The eurozone faces a disastrous, 1 trillion-eruo blow if Greece is allowed to slide into a chaotic default, international
bankers warned today.
The leaked, doomsday scenario emerged from the Institute of International Finance -- the body representing the banks and hedge fund holders of Greek debt leading negotiations with Athens over the financial rescue.
It comes two days ahead of a crucial deadline for investors holding 206 billion euros in Greek bonds to sign up to a swap cutting the value of their debt by around 75 percent to ease the beleaguered nation's debt pile.
The memo warned of "very important and damaging ramifications" from a Greek default, including further bailouts for Portugal and Spain as well as 350 billion euros pumped into Spain and Italy to prevent an even more catastrophic collapse. The European Central Bank -- facing 177 billion euros in losses on Greece -- may also need to be recapitalised, it added.
The raising of the stakes by the IIF further fueled the jitters in stock markets this week, after China pared back growth targets Monday.
The FTSE 100 Index slid 1 percent to 5815.4 while benchmark borrowing costs for Italy, Spain and France all rose today.
But the timing of the leak also looked like an attempt by the IIF -- whose 12 committee members holding 20 percent of the bonds to be swapped have already signed up for the agreement -- to bring other heel-dragging investors into line. If the swap collapses Greece will default when a 14.4 billion euros bond repayment falls due March 20.
CMC Markets analyst Michael Hewson said that the leaked document was simply a "big stick" to beat the banks and investors who have yet to sign up to the deal.
But he added: "Anybody who thinks this deal is the answer for Greece is living on another planet. The deal is just solely serving to promote vested interests in the banking sector, as hardly any of the money is going to actually help Greece's economy. The IIF is just trying to put the fear of God into people."
Ideally, Greece wants 90 percent of investors to sign up to the swap, although finance minister Evangelos Venizelos has set a 75 percent threshold to go ahead with the deal. With between 75 percent and 90 percent taking part, Athens could also decide to press ahead, activating "collective action clauses" to force recalcitrant investors to participate. Below 67 percent would be a disaster as the CACs cannot be enforced, although unofficial estimates currently suggest participation in the low 70 percent.
Lloyds Bank Corporate Markets analyst Eric Wand said: "Our central scenario remains that Greece will not achieve the 90 percent voluntary participation but will meet the 66.7 percent acceptance thresholds and thus activate the CACs to complete the process."
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