From the Financial Times Lex columns
Debt defaults are a bit like falling in love. Sometimes there is a clear single moment: a flood of emotion, no money in the bank. But more often than not these new states of being creep in gradually. It can take months or years to cross definitively the border between liking and love; and debtors, especially big and complicated ones, slide gently from ability to inability to pay. Still, if a single economic line must be drawn, Greece has already crossed it.
Indeed, the Greek equivalent of "just friends who spend a lot of time together" has long since been passed. While the sovereign's interest and principal payments are still technically in order, that has required an official bailout at terms regular lenders would never have agreed to and the European Central Bank's decision to twist its rules so as to accept Greek collateral on non-market terms.
The markets too are screaming "default" – the two-year Greek sovereign bond is yielding 26 per cent. That is an invitation for the Greek government to make what rating agency Standard & Poor's calls a distressed exchange offer, buying the securities at a big discount. Such an exchange would make economic sense, a bit like moving in together. But S&P would call that default, and Greece's paymasters are not yet ready to go public.
Whatever the political reasons for this reticence, the contortions needed to stretch a veil of legal propriety over economic reality are now almost unbearable. The ECB is even intimating it might look the other way if the default is selective or temporary, or if at least one big rating agency refrains from declaring the bonds in default. Ignoring S&P, apparently, is now an option.
Why not face the facts? In default as in love, the greatest pain comes from the denial of reality.