Open Europe Blog

A leaked document from the Institute of International Finance (IIF) has been doing the rounds recently and has some rather alarming statistics regarding the cost of a disorderly Greek default in it (see here for full doc). The document is well worth a read if not just because it sheds some valuable light on the thinking inside an institution which, up until the few months ago, very few people had any knowledge of.

As far as we’re aware the doc was first released by Athens News (we’ve done an interview with them presenting our thoughts which we will post in due course), but for now see our initial thoughts on the claims that a disorderly Greek default could cost as much as €1 trillion:

– The IIF does have a vested interest in seeing the current plan succeed and has played a substantial role in negotiating it, which should be kept in mind when reading their analysis of the ‘alternative’ of a disorderly default.

– As our latest report on Greece highlights, the current plan for Greece does not actually decrease the prospect of a disorderly default. It offers little real debt reduction and simply transfers the debt from private to public sector (making any future default more costly for taxpayers). If anything then, the warnings in the IIF report could also be a read as the potential consequences of the current path of action which risks shifting the cost of a disorderly default further onto taxpayers – the consequences of which could be hugely problematic for Europe and the global economy.

– A disorderly default is the worst case and would be incredibly painful for Greece and the eurozone, however, to present it as the only alternative to the current plan is misleading. This is a diametric choice engineered by the EU/IMF/ECB and even the IIF. There is still the option of a managed restructuring offering a greater write down with a simpler process and therefore better value for money than the current plan.

– The document mentions the social cost of a disorderly default, which would be very high, but the IIF and the troika continue to ignore or just accept the social costs of the current plan. The massive austerity threatens to create a downward spiral in the economy, while the riots show a glimpse of the tensions simmering underneath the surface in Greek society.

– There is much discussion of contagion but there has been little thought given to the potential knock on effects of the current plan, from aspects such as the legal gymnastics to protect the ECB to the lack of a comprehensive solution.

Does this document, then, simply constitute scaremongering on the part of the IIF?

That may be going a bit far, but as we point out above there are certainly caveats to consider when examining their estimates. The key point is that the current plan simply kicks the chances of disorderly default further down the road, beyond the end of this year at best. However, at that point, the potential for dire consequences of a disorderly default set out in the IIF report, will not have gone away.

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