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Greek default will cost eurozone €1 trillion

A DISORDERLY Greek default would cause more than €1 trillion of damage to the eurozone and could leave Italy and Spain dependent on outside help to stop contagion spreading, the main bondholders group has said ahead of today's deadline.

Greek private creditors have until this evening to say whether they will participate in a bond swap that is part of a bailout and restructuring deal to help it manage its finances and meet a debt repayment on March 20.

Investors will lose almost three-quarters of the value of their debt in the exchange.

Finance Minister Evangelos Venizelos said earlier this week that 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.

"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 eurozone countries.

Spain and Italy might require €350bn in outside support to contain the fallout, the IIF said, while the cost of helping Ireland and Portugal could total €380bn over five years.

If the deal fell apart, the European Central Bank would suffer substantial losses because it's estimated €177bn exposure to Greece is over 200pc 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 €160bn if no swap is agreed.

Irish Independent