Greece likely to face systematic default: Lloyds Bank

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With the clock ticking before the February 13 deadline to submit a final debt swap offer to private sector bondholders, the pressure on Greece is heating up. Greece needs to receive their next tranche of aid by March 20 to avoid default. A series of steps need to be taken before the bailout funds can be released once a PSI deal is announced.

Stating that there are serious risks that Greece could end up in a default, Jeaven Lolay, Head of Global Research at Lloyds Bank feels that something serious may evolve from decisions in the next 48 hours. "There is a certain level at which the politicians will have to realise that they want to get as much critical capital as they can from standing up against these reforms. It is in the hands of the EU and official lenders because the actual debt default date is getting closer with every passing day and implementation will take time," he said.

If the default does happen, Lolay anticipates a major sell-off in the euro. According to him, the euro could easily go sub 1.20 against the dollar.

Below is an edited transcript of his interview. Also watch the accompanying video.

Q: Although Greek politicians have the time to arrive at some consensus regarding the second bailout but with every passing day it seems inevitable that Greece will face a default?
 
A: The point I was going to raise is exactly as you said. It is a sorry story about the conclusion as the day gets closer because Greece needs to get a second bailout. We still need to move to implementation stages and if the PSI cannot get together then either on March 20, we will have a debt default. I think there are now serious risks that Greece could end up in a default.
 
Q: Distinguish between what you think will be an orderly default and what could potentially be a disorderly default. This is a distinction that economists, market people across the world have been making saying if it is an orderly default, we are not that worried about contagion. Markets will not go into a tailspin but if it is chaotic or messy then who knows what the final outcome could be?
 
A: An orderly default means something which has been agreed in terms of discussions; move on from where they are now to say we cannot make these terms as one of the options available to us, and then something comes out, which is more formalised. When we talk about disorderly, we mean all of a sudden, we wake up to a default, in which case there are too many legal implications, which are above and beyond from the considerations being undertaken now.
 
Q: But the way things are going, doesn't it seem more likely that it's will be a disorderly default as opposed to an orderly one because they haven't even been able to arrive at terms of agreement with private lenders and the debt swap?
 
A: I think the deal with the private lenders is committed on what happens with the second bailout because the second bailout will help funds from the issues relating to that deal. I personally think that they are probably very close to the PSI deal.
 
The biggest thing is the second bailout in terms of does it become likely? Yes, it does. Is it likely at this stage? Parties will do something to avert that so I expect Greece politicians potentially to back down because a probable election is nearing; the elections are only few months away but ultimately Greece realises that it has no choice but to deliver on what is required on these reforms.