The group representing the biggest holders of Greek bonds has said a disorderly Greek default would cause more than €1 trillion of damage to the euro zone and could leave Italy and Spain dependent on outside help to stop contagion spreading.
Greek private lenders have until Thursday night to say whether they will participate in a bond swap that is part of a bail-out deal to help it manage its finances and meet a debt repayment on March 20.
Worries about whether the swap will be successful sent stock markets sharply lower today.
Investors will lose almost three-quarters of the value of their debt in the exchange. Finance Minister Evangelos Venizelos told Reuters yesterday it was the best deal they would get and those who did not sign up would still be forced to take losses.
Analysts said the Institute of International Finance document, marked "IIF Staff Note: Confidential", may have been designed to alarm investors into participating in the exchange.
"There are some very important and damaging ramifications that would result from a disorderly default on Greek government debt," the IIF said in the February 18 document obtained by Reuters. "It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed €1 trillion."
If Greece misses the March 20 payment without a deal in place, this would be seen as a disorderly default and could be taken as a sign that politicians have lost control of the euro. Investors might then target other weak euro zone countries.
Spain and Italy might require €350 billion in outside support to contain the fall-out, the IIF said, while the cost of helping Ireland and Portugal could total €380 billion over five years.
If the deal fell apart, the European Central Bank would suffer substantial losses because its estimated €177 billion exposure to Greece is over 200% of its capital base, the IIF said.
The bank lobby group, which helped negotiate the swap on behalf of creditors, also said bank recapitalisation costs could easily hit €160 billion if no swap is agreed.
A dozen major Greek bondholders, all on the IIF steering committee that helped draw up the deal, said on Monday they would support the swap. They hold about one-fifth of the €206 billion of bonds in circulation. The remaining investors are under pressure to sign up.
Greece wants a take-up of 90% or more and if it falls below that but exceeds 75% it is expected to use collective action clauses (CACs) to force losses on those who do not volunteer. Below that level, the deal could be off, potentially plunging the euro zone back into crisis.
The Greek finance ministry has denied speculation that it is planning to extend the deadline on the offer, highlighting the jittery mood just two days before final decisions are due.
Using the CACs would probably trigger pay-outs on bond insurance contracts (CDSs) and would also increase the chance of hedge funds or other bondholders pursuing legal action.
Greece raises billion as costs dip
Greece today raised €1.137 billion in a sale of six-month treasury bills, with the interest rate paid dipping ahead of a major debt swap, the debt management agency said.
The sale, aimed at raising at least €875m, came two days before the end of a swap to cancel half of Greek debt held by private banks and investors.
"The total bids reached €2.298 billion and the amount finally accepted was €1.1375 billion," the debt management agency said.
Meanwhile, Greece's privatisation fund today launched a tender for the exploitation of a large seaside plot on the western resort island of Corfu, part of a massive effort to raise funds through sale of state assets.
The Hellenic Republic Asset Development Fund said it is seeking to sell the "right of surface" for the 120-acre, forested property at Kassiopi for up to 100 years.
The tender is part of Greece's bid to raise €50 billion through an open-ended programme of privatisations and concession sales, half of which will involve property. The country has committed to raise €19 billion of that sum by 2015.
A statement from the fund invited investors to submit expressions of interest by April 10 in the Corfu property, which is in the northeastern part of the island. About a third of the land can be developed, and one idea is that it could be used to build an upmarket residential complex to be used as vacation homes and hospitality or leisure facilities.
The fund has already launched tenders this year for the sale of the DEPA gas company and commercial property in Athens.
Greece has committed to the privatisation programme in exchange for the international rescue loans that have been keeping it afloat since May 2010. The initial deadline for the entire programme was 2015, but that was later relaxed to allow its better implementation.
Greek officials say they expect the programme to create some 50,000 jobs by 2015, and boost investment and growth. The country is in its fifth year of recession, which has pushed unemployment up to a record 21% in November with more than a million people out of work.
