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Anti-riot police try to detain a demonstrator in Thessaloniki, northern Greece.


Greece is rapidly running out of time and money to avert a bond default that threatens to unleash a torrent of trouble for governments, banks, markets and economies across Europe, and put the fragile global recovery at risk of another crippling credit crunch.

A default would saddle several European banks and the European Central Bank itself with heavy losses, but its biggest impact could be in the damage to confidence and trust that would spread through the global banking system and capital markets. The damage would reach into some unexpected corners.

Such major German and French banks as Deutsche Bank, Société Générale, Crédit Agricole, and Commerz Bank would be under pressure to recapitalize, which could trigger a severe cash crunch and a flight to safety by depositors, analysts warn.

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"This is bound to induce contagion across the entire euro area and spill over to the euro-area banks' cross-links to Eastern and Central Europe and beyond," said Constantin Gurdgiev, head of research with Swiss-based St. Columbanus AG. "The Romanian and Bulgarian banking systems are heavily dependent on Greek banks and their own banks' collapse will put huge pressure on Hungary."

The ripple effects could reach as far as Ukraine and Turkey and flatten Cyprus's financial sector, whose exposure to Greek debt totals 156 per cent of the country's GDP. Cypriot banks, in turn, hold massive Russian deposits.

"I hate to sound like [former U.S. defence secretary Donald]Rumsfeld, but we have very few known unknowns and we have a lot of unknown unknowns," said Carl Weinberg, chief economist with High Frequency Economics in Valhalla, N.Y.

These include which institutions are on the hook for credit-default swaps tied to Greek debt and other complex derivatives linked to them, as well as interest-rate-based financial structures based on Greek or other euro-denominated bonds.

Thus even small exposures – U.S. banks hold only $1.5-billion (U.S.) in Greek debt, and British banks are on the hook for $3.4-billion – could be masking considerably larger off-balance sheet risks.

A default by tiny Greece would also have an immediate impact on the European bond market, driving up already record high spreads on debt issued by the troubled big economies of Italy and Spain and making life even more miserable for Portugal and Ireland, the other two fiscally damaged recipients of bailout money in the euro zone.

It would even hurt German bonds, long regarded as the safest harbour in the euro zone, while driving more investor capital to U.S. Treasuries, Canadian government bonds and other debt regarded as being on a more solid footing.

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"The big surprise will be the German government bond market, which has rallied enormously, because everyone says Germany is safe. I'm not quite sure why that is," Mr. Weinberg said. "Just because their banks are domiciled in Germany doesn't mean they're safe from anything."

Greek officials have repeatedly denied a default is imminent. But they face imposing obstacles and deteriorating economic conditions that are derailing efforts to get the government's fiscal house in order and satisfy conditions set by euro-zone policy makers for more relief.

Greek electrical utility workers vowed Monday to block collection of a new property tax designed to appease the so-called troika of euro-zone, European Central Bank and International Monetary Fund officials overseeing the bailout. The tax, expected to bring in an additional €3-billion in revenue, is supposed to be tacked on to electricity bills for quick collection.

Athens acknowledges that it will be unable to pay its bills by next month if it doesn't receive the next slice of bailout money of about €8-billion.German and French policy makers have stopped insisting there is no chance of a Greek default and have begun focusing on shoring up their banks to cushion them from losses.

"I just don't see how they're going to avoid a default," said Satyajit Das, an independent risk consultant who works with European banks. The goal now, he said, is to prevent the contagion from critically damaging their own banks and spreading from there to other financial institutions and economies.

"The government has months, if not weeks, [to survive]at this point, and any new government, likely a coalition, will have little capacity to meet austerity more effectively," said political risk expert Ian Bremmer, president of Eurasia Group. "All of which makes the situation extremely precarious at a time when any goodwill toward Greece by its euro-zone partners is quickly evaporating."

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