TO many private-sector economists, the idea that Greece eventually will have to default on its towering debts is almost a foregone conclusion. But the path has plenty of pitfalls.
Euro-zone nations that rescued Greece have told their citizens they wouldn't lose money. Enfeebled Greek banks hold Greek debt, so their losses might need to be patched by the government.
And, paradoxically, a default would likely entail more international bailout money since Greece would be cut off from the financial-market funding it still needs to survive on its own.
"The time for easy solutions is long passed," says Sony Kapoor, managing director of Re-Define, a Brussels-based economic think tank.
Already-high market expectations of a default -- or "restructuring," in polite parlance -- have risen in recent days, pushing Greek bond yields higher. Greek and EU officials have lined up to reject the possibility.
"We do not see debt restructuring as an option," EU economy commissioner Olli Rehn said on Thursday at the Brookings Institution in Washington. Lorenzo Bini Smaghi, a member of the European Central Bank's executive board, said in a newspaper interview on Thursday that after a restructuring "the Greek economy would be on its knees".
But bond yields continued to climb on Friday, reflecting investors' deepening scepticism that Greece will be able to tolerate a debt burden projected to rise above 1.5 times its annual economic output this year.
The 110 billion euros ($150 billion) bailout conceived by the European authorities and the International Monetary Fund doesn't directly shrink that pile -- indeed, the bailout comprises simply more loans. The EU reckons that Greece's government debt will rise to 375bn euros in 2013 from 298bn euros in 2009.
Absent a restructuring, the debt won't decline until Greece frees up cash to pay it off. That will require a massive overhaul of Greek finances; the state hasn't had a budget surplus in more than two decades.
"Markets are currently factoring in a restructuring of some kind -- and soon," says Kenneth Wattret, chief euro-zone economist at BNP Paribas in London.
One possible form of a restructuring is a "haircut," in which bondholders are repaid less than they lent. Still, Mr Wattret points out that it's not quite so simple.
A haircut could jostle the European banking system by forcing losses on the banks that hold Greek debt. It could also rock other weak euro-zone countries. Delaying restructuring delays that reckoning. "To an extent, that's been working," says Mr Wattret, who points out that the passage of time has led markets to look much more favourably on Spain. There are other hurdles.
Economists at the Brussels think tank Bruegel calculate that roughly 20 per cent of Greece's debt at the end of 2010 was held by domestic banks. They are in difficult straits, and forcing losses on them may simply require the country's rescuers to come up with more money to help.
About a third is held by "non-banks," including pension funds and insurance companies. The EU would want to "stress test" those institutions before considering losses, says Andre Sapir, a Bruegel economist. And, he says, pension funds are politically sensitive. "There are people behind them."
As the euro-zone countries and the IMF dole out their loans to Greece, progressively larger portions of the debt become held by that "official" sector. Mr Kapoor calculates that, because of difficulty meeting budget targets in Greece, the lion's share of the 110bn euros will need to be given by the end of this year.
On the EU side, the bailout comprises 80bn euros in direct loans from 15 euro-zone countries to Greece.
A restructuring could well mean losses for those 15 lenders, which would be deeply resented in Germany, Finland, the Netherlands and other strong countries whose voters were wary of the bailouts to begin with. The euro-zone bailout loans explicitly rank equally with existing creditors, making it hard for the euro-zone countries to demand that private-sector creditors take haircuts while exempting themselves. The resolution remains uncertain.
"From a political viewpoint, it was hard for me to see the (euro-zone countries) taking a loss," says Mr Sapir. "From a legal viewpoint, it was hard for me to see them not taking a loss."
And Greece will, almost certainly, need more money. The EU currently anticipates that Greece will begin issuing long-term debt again on financial markets in the first quarter of next year.
That appears unlikely given current bond-market conditions. But Greece currently still runs a deficit large enough that even if it stops making all interest payments, it would still need to borrow more. That money would have to come from somewhere.
Additional reporting: Todd Buell and Matthew Dalton contributed to this article.
