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The fear of a contagion among EU nations which need or want bailouts has changed over the past few days to a concern about how one default could trigger many others.

For months, economists and capital markets investors who monitor the EU rescues were concerned that financially weak nations would find it convenient to request aid because Greece was able to do so with relative ease. The Greeks paid a price, although many of the country’s wealthiest citizens still pay no taxes. Austerity budgets have been enacted, resulting in steep pay cuts for many public workers.  But, all in all, the price has not been terribly high. Hundreds of thousands of people were not thrown out of work. Basic government services remain.

The money made available to Greece was done so at rates lower than those that capital markets would have demanded. Ireland received the next bailout at rates that were also well below the yields that markets required. The new Irish government contends that its predecessor did a poor job of negotiation, but Ireland was in no position to set favorable terms.

Portugal is now in the midst of  talks to receive $130 billion from the EU and IMF.  Minority party officials there want a place at the bargaining table, presumably to fight for the most favorable bailout terms received in the region so far. Portugal’s political leaders can examine the Irish and Greek deals and hope to tell voters that they have been able to do better.

Many credit experts have said that Greece will probably default on its sovereign debt in 2012 just as much of it has to be repaid or refinanced. The IMF and EU have been strident in their comments that a default is not possible. But, there were press comments that IMF officials have already put together a case for a Greek default now that Germany has signaled it is not willing to pay additional large sums into bailout facilities. According to Bloomberg, German Deputy Foreign Minister Werner Hoyer said that a Greek restructuring “would not be a disaster.”

New elections in Finland have made it more likely that the True Finn party, which is against the nation’s participation in bailouts, will gain power. The most immediate effect of this would be trouble with Portugal’s package. Finland could veto a rescue.

So, Germany and Finland may move to the bailout sidelines. The cost to insure Greek debt has risen. Ireland is pressing for better terms. Portugal may have its aid package blocked.

The pendulum has swung from the trend of nations asking for bailouts to one of nations considering defaults. It would be naive to believe that the Greeks are not exploring the option now that the Germans have discussed it. Greece may want to keep its credit status, albeit a relatively poor one, but it seems less and less likely if default is assumed.

Many economists have said that one way to restructure Greek paper is to defer debt payments. This would make it a non-default default as if there is any such thing. The move would involve forcing investors to do something other than what is in their covenants, so it hardly matters what the action is called.

Default contagion has become a real possibility. If Greece forces a restructuring on its creditors and the euro does not collapse, Ireland will look at the terms of Greece’s  new debt and logically think it can get the same. Portugal will assume this as well, if it has been rescued. Or, the entire sequence could go in the opposite order. Finland could block a bailout of Portugal, probably with Germany’s tacit agreement. Portugal would turn to the owners of its debt and say that it has no recourse. Portugal’s neighbors will not help it, so it must ask big banks including its own, other nations which have held it paper for some time, and even individual investors to either take a cut in principle value or a deferral of payments. It is not a foregone conclusion that banks will have to write down the sovereign paper from Portugal, Greece and Ireland. Perhaps a deferral of interest payments and liberal interpretations of bank accounting will prevent a catastrophe.

Any predictions about restructuring Greece, or Ireland or Portugal is fantastic. There is no way to put odds on any defaults just as there were no odds on whether bailouts would be contagious from nation to nation. However,  is not fantastic to believe that if one EU nation can reach new terms with its lenders that others will not expect that same. The fact that it would be a new kind of contagion is not fantastic at all.

Douglas A. McIntyre