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European leaders are braced for the eurozone’s first ever sovereign default this week as Greece’s efforts to secure a €206bn (£172bn) “voluntary” bond swap looks increasingly unlikely.
Authorities in Athens are ready to enforce the controversial collective action clauses, or CACs, to impose the restructuring deal on all bondholders as the number of voluntary agreements look set to fall short of the required amount.
Credit rating agencies have warned they will declare Athens to be in default if the CACs are triggered which would be a dramatic culmination to a three-year rollercoaster ride for Athens, the eurozone and global markets.
While the markets have been ready for a Greek default for months, the move could leave Greece and its banks barred from funding from the European Central Bank (ECB). On Monday, Standard & Poor’s declared Greece to be in a state of “selective default” which led to the ECB announcing it would no longer accept Greek government bonds as security for new loans.
"What happens next is unknown territory.
"Greek banks will probably be barred from normal ECB funding and have to turn to the Emergency Liquidity Assistance [provided by the ECB] instead but for how long, we don’t know.”
Greece needs around 95pc of its private creditors to accept the deal by the deadline on Thursday in order to secure its €130bn international bail-out package and avert imminent bankruptcy.
The wave of downgrades follows the belief by some economists that the Greek rescue plan is bound to fail.
Even after deep austerity cuts that are intended to reduce government debt from 160 per cent to 120 per cent by 2020, Greece still spends more than it receives in tax revenues.
While more austerity could further impoverish Greece as it struggles to dig itself out of a debt abyss, financial analyst Karl Denninger told RT the writing is already on the wall.
“I think it’s inevitable that Greece is going to default. I don’t see how they can get out of this mess other than by defaulting. They have spent the money, they don’t have it, they can’t contract their government spending and economy enough to be able to pay it back, and so the obvious thing to do is to walk away and say ‘so sorry, so sad, we’re not going to pay you.’ The knock-on effects, again, depending on what other nations decide to go down the same road, could be incredibly severe.”
If Denninger’s assessment is correct, Greece very well may be on the path to being the first developed country to default since World War Two.
And if Athens reacts to a default by not paying interest on its bonds, its potential exit from the eurozone could threaten the future of the entire currency union.