19/05/2011
By Matt Ritchie
A Greek default is ‘highly likely’, and there is little sense in trying to solve the heavily indebted state’s problems with further borrowing and more austerity, according to Investec Asset Management.
In a briefing note issued to journalists, Investec said while it believes default is inevitable, the form of default is yet to be determined.
“The reason for this is very simple: according to the latest IMF Fiscal Monitor, Greece needs to run a cyclically-adjusted primary budget surplus of 6% just to stabilise debt at 145% of GDP. In other words, the treasury needs receipts to be in excess of expenditure for several years just to stop debt increasing even further. The Greek public are clearly unwilling to accept this, as evidenced by last week’s general strike.”
With outstanding debt of €262 billion and access to market funding shut off, the country is reliant on further loans from the IMF, EU and ECB in order to redeem maturing debt, Investec said.
However, the company said European authorities worry that a Greek default will set off a chain reaction as the banking sector in Greece melts down, and are therefore “unwilling to contemplate an orderly restructuring”.
Investec said the hesitancy is “perhaps understandable” given that a Greek default would be the first among developed markets since the end of the second world war.
The company said the most likely outcome is a “typical European ‘muddle-through’”, with a German-led recovery pulling the rest of the Eurozone along.
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