????The opportunity for debt-troubled Europe to avoid a disaster is shrinking. Fast. Over the weekend, Greek leaders struggled to agree to a set of radical budget cuts as the country approaches an October deadline to qualify for $11 billion in aid without which it will certainly default on its growing debt.
????As the bailout of Greece spirals into a costly mess, officials have raised the idea of an "orderly default." Germany's economy minister Philipp Roesler publicly introduced the concept and, needless to say, the mere mention of bankruptcy was anything but calming for global investors.
????German Chancellor Angela Merkel stepped in, telling BBC News that the eurozone must stick together and that there aren't any procedures underway to ease Greece into a default that promises a softer landing. Merkel may have been trying to allay investors' fears, but most now see it for what it is: Greece is already preparing for what it hopes will be an orderly default, even though the country has not yet technically declared bankruptcy.
????An orderly default is equivalent to restructuring debt -- whereby creditors accept a loss while debtors agree to pay most of its debts. In July, European Union leaders agreed to a rescue plan for Greece worth more than $150 billion, which would help it cover its financing needs for the next several years. One of the key elements of the plan, which is awaiting final approval, is a bond swap deal in which Greece's debt burden is reduced, while the country's private-sector creditors agree to accept new bonds worth less than their original holdings.
????In the past, other nations have pulled off orderly defaults successfully. Could Greece, Ireland, Italy and other troubled nations in the eurozone do the same? Judging by the general surge in bond yields of the peripheral countries, it looks less likely.
????Developing nations have completed orderly defaults before. For instance, the Brady bonds in the late 1980s and early 1990s arose from an effort to reduce debt held by mostly Latin American countries that were frequently defaulting on loans.
????The Ukraine and Pakistan have also defaulted in orderly fashion. So did Uruguay in 2003. The country successfully did a voluntary bond swap in which the government offered to exchange bonds coming due in a few years for similar ones that matured later. The move was enough to convince investors that its problems were temporary and that with time, Uruguay would be better off since its growth prospects were strong.
