On 13 July 2011 the Vice President of Greece, Mr. Evaggelos Venizelos, announced that the country is facing the possibility of a selective default. A new term entered the economic life of Greece and Greeks are desperately trying to understand the effect that it will have in the economic life of the society.
What is a Selective Default?
Selective default occurs when the obligor-country (in this case Greece) has failed to service one or more financial obligations, but continues to serve others and will be able to restart servicing all its financial commitments in a timely manner.
Who is going to decide if Greece is facing selective default?
Credit ratings agencies are going to decide if Greece is facing a selective default. Nevertheless, the International Swaps and Derivatives Association (ISDA) is going to come to a decision if this is a credit event and if the Credit Default Swap (CDS) contracts will be paid. So, it is ISDA that have the final call and not the credit rating agencies.
How it will affect Greece?
If the selective default does not last for long then most probably there will be no serious difficulties for the Greek society. Banks will not face any liquidity problems as the European Central Bank (ECB) will activate the Emergency Liquidity Assistance (ELA) and the state will continue to pay pensions and wages. The situation will be different though if selective default is prolonged and the financial markets perceive it as the first step of a real default.
Once again the Greek economy is at a crucial crossroad. Selective default is not de facto a negative development. It depends on the time that it will last and on the political actions that the Greek government will take in order to persuade international financial markets that the country will be able to restart servicing its financial commitments in a timely manner and that it will emerge stronger from this test.
Of course, we should always take into consideration that the Greek economy has lost its credibility. Additionally, Greeks are very skeptical toward any economic initiative that the government is taking. Since last year the Greek government has slashed public sector salaries and increased taxes in an attempt to avoid default. Austerity has become a red flag for many Greeks as they believe that this is not the answer to the economic problems of the country. Unemployment has been increased, every day almost 770 people are losing their jobs and the economy is predicted to shrink as much as 3% this year.
So, is there a way out? Will it be possible for the Greek economy to rebound after a selective default? This is something that we will have to wait and see.
