According to a senior IMF economist who wasn’t identified, Greece will likely face a “hard default” well before March 2012.
It could happen during 2011, and perhaps after the current round of negotiations. This acknowledgement from someone very close to the matter in a body that is heavily involved in the bailout, is quite worrying.
The current talks are around the first bailout, agreed more than a year ago. Greece definitely missed its targets. The EU /IMF delegation suspended its visit to Greece after discovering that the deficit will be higher. They are expecting fresh steps to be taken by the Greek government.
The Greek government says any more steps will only deepen the recession and make things even worse. The debt trap is quite clear at this stage.
These complications triggered not only the aforementioned expectations for a hard default, according to WSJ:
“I expect a hard default definitely before March, maybe this year, and it could come with this program review,” said a senior IMF economist who is keeping close tabs on the situation. “The chances for a second program are slim.”
A hard default means a messy one. A default that is not controlled could have a serious domino effect: it can push banks to bankruptcy (such as French banks, that are highly leveraged), and it can send bond yields of other countries much higher. A hard default for Greece also seriously endangers .
The ECB has bought Spanish and Italian bonds and managed to stabilize things: 10 year yields stood on around 5% after the intervention. The recent retreat of Italy on some of the suggested measures and the political problems of Berlusconi sent yields up once again.
All in all, the bailout mechanism secures only one thing: a crisis on every inspection. Last time, it ended with a reshuffle of the Greek governments, fresh austerity measures and violent protests on the streets of Athens.
Opposition is also growing in the donating countries. Will the current round be a chance for a change?
This is one of the things that sent EUR/USD down on Friday, despite the zero job gains in the US and the higher chances of dollar printing.
This will add to the weight on EUR/USD at the beginning of the week.
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