Greek options. Markets for the week ending 7-Feb-10

As the markets brace itself an escalating EU crisis, I wonder what options are available realistically to Greece..

1) Go-it-alone fiscal adjustment
This is the most probable approach that the Greek government will take to convince the markets and other European nations that it will be able to handle it's own domestic affairs, at least for the time being. It's a polite way of handling its problems but the feasibility is low. This will take a lot of support from the nation as it prepares to slash government budgets and halt pay increases for the government sector.
FEASIBILITY RATING: LOW

2) EU Bail-out
The main issue of an EU-led bail-out is the moral hazard attached. A modern Trojan Horse tale of how the Greek army invaded the city of Troy (in this case Germany and France) and opened the gates for Spanish, Irish and Italian armies could be written in the books of modern finance history. However, if the EU can agree on how the bail-out can be structured it could be feasible. I'm in favour of loan guarantees or short-term bridging loans, with strict conditions attached of course.
FEASIBILITY RATING: MEDIUM

3) Default or Debt restructuring
This could give temporary relief to Greece as it writes down its debt but will have a large cascading effect on other eurozone economies. We have already witnessed how Portugese CDS spreads have widened since the Greek crisis began and a default would make it costly for it's neighbours to raise debt.
FEASIBILITY RATING: LOW

4) Go NUCLEAR!
A full blown default and devaluation in Argentinean-style is what the markets fear most. Greece will have to leave the EU and this will have significant domino effect on the world economy as the Euro collaspes. The Greek GDP may fall as much as 10% and having most of it's debt denominated in Euros, it will be a long time until Greece recovers from its post-crisis trauma. However, markets have short memory and it may not be long before they start buying Greek debt again
FEASIBILITY RATING: VERY LOW

Eric Tan,
London