History's first sovereign default came in the 4th century BC,committed by 10 Greek municipalities. There was one creditor: thetemple of Delos, Apollo's mythical birthplace.

Twenty-four centuries later, Greece is at the edge of thebiggest sovereign default, and policy makers are worried aboutglobal shock waves of an insolvency by a government with 353billion euros ($483 billion) of debt — five times the size ofArgentina's $95 billion default in 2001.

“There is a monstrously large amount of uncertainty and amassive range of possibilities,” said David Mackie, chief Europeaneconomist at JPMorgan Chase & Co. in London. “A macroeconomicdisaster could be averted but only by aggressive policy action” bycentral banks and governments.

After two international bailout deals, three years of recessionand budget-cutting votes that almost cost him his job, Greek PrimeMinister George Papandreou says throwing in the towel now would bea “catastrophe.” Potential consequences of a national bankruptcyinclude the failure of the country's banking system, an even deepereconomic contraction and government collapse.

The fallout may echo the days following the 2008 implosion ofLehman Brothers Holdings Inc. when credit markets froze and theglobal economy sank into recession, this time with the prospectthat the 17-nation euro zone splinters before reaching its teens.The International Monetary Fund, whose annual meetings start inWashington today, reckons the debt crisis has generated as much as300 billion euros in credit risk for European banks.

Default Risk
Credit-insurance prices onGreece indicate the chance of default at more than 90 percent.Investors can expect losses on Greek debt of as much as 100percent, says Mark Schofield, head of interest-rate strategy atCitigroup Inc. in London.

“People, justifiably, think the crisis is what we're living now:cuts in wages, pensions and incomes, fewer prospects for theyoung,” Greek Finance Minister Evangelos Venizelos told reportersyesterday in Athens. “Unfortunately this isn't the crisis. This isan attempt, a difficult attempt, to protect ourselves and avert acrisis. Because the crisis is Argentina: the complete collapse ofthe economy, institutions, the social fabric and the productivebase of the country.”

Even if Greece receives its next aid payment, due next month,default beckons in December when 5.23 billion euros of bondsmature, said Harvinder Sian, senior interest rate strategist atRoyal Bank of Scotland Group Plc.

'Too Late'
“It's too late for Greece,” HowardDavies, a former U.K. central banker and financial regulator, told“Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The Greeksituation is tumbling out of hand and I suspect Greece will not beable to avoid a substantial default.”

The introduction of the euro and global financial connectionsmean previous Greek defaults in the 19th and 20th century, mostrecently in 1932, don't provide a decent precedent for a failure tosatisfy lenders now.

“Contagion will be violent” as the price of the two-year Greeknote tumbles below 30 cents per euro from about 65 cents now,predicts Sian. The European Central Bank would be the firstresponders through purchases of government debt, he says.

Greek Banks
The country's banks, of whichNational Bank of Greece SA is the largest, would be the nextdominoes. They hold most of the 137 billion euros of Greekgovernment bonds in domestic hands, a third of the total and threetimes their level of capital and reserves, says JPMorgan Chase. Asthose bonds are written down and equity wiped out, banks would losethe collateral needed to borrow from the ECB and suffer a rush ofwithdrawals that likely triggers nationalizations, said CommerzbankAG economist Christoph Balz.

“No banking system in the world would survive such a bank run,”said Frankfurt-based Balz.

A hollowed-out banking sector wouldn't be the only danger to aneconomy that the IMF says will contract for a fourth year in 2012.The Washington-based lender said this week that Greece will shrink5 percent this year and 2 percent next year, reversing a forecastof a return to growth in 2012.

Unemployment is set to rise to 16.5 percent this year, and to18.5 percent next year, the highest in the European Union afterSpain and dry kindling for potential social unrest.

Even after saving 14 billion euros in debt repayments, muchdepends on what deal Greece could strike with its creditors.

Debt Load
To restore market confidence thedebt needs to be pared to below 100 percent of gross domesticproduct, Stephane Deo, chief European economist at UBS AG, said ina July study that noted national default was “invented” in Greecewith the Delos Temple episode. At the time, the IMF was projectingthe debt to peak at 172 percent next year.

The current debt suggests to him a reduction in the face valueof outstanding securities — or haircut — of about 50 percent, whichwould pare the burden to around 80 percent of GDP, the same asGermany and France. Citigroup's Schofield estimates a writedown of65 percent to 80 percent, potentially rising as high as 100 percentas the economy slows further.

If default is limited to Greece, the fallout may be contained,say Nomura Securities International Inc. strategists including NewYork-based Jens Nordvig, whose projections allow for an 80 percenthaircut. They estimate euro-area banks would lose just over 63billion euros, with German and French institutions losing 9 billioneuros and 16 billion euros respectively. The ECB would face about75 billion euros in losses on Greek debt it has bought or receivedas collateral, they say.

'Large Haircuts'
Such amounts suggest “thelosses from Greece-related exposures in isolation look manageable,even in a disorderly default scenario with large haircuts,” thoughthe ECB would probably require fresh capital from euro-areagovernments, Nordvig and colleagues said in a Sept. 7 report.

A debt exchange that was part of the second Greek bailoutapproved by European leaders in July would impose losses of aslittle as 5 percent on bondholders, according to a Sept. 7 reportby Barclays Capital analysts.

The risk is that the rot spreads beyond Greece as investorsbegin dumping the debt of other cash-strapped European nations,said Ted Scott, director of global strategy at F&C AssetManagement in London. Portugal and Ireland have already been bailedout, while speculators have also tested Italy and Spain. Italy, theworld's eighth-largest economy, has a debt of almost 1.6 trillioneuros, while Spain, the 12th biggest economy, owes 656 billioneuros.

'Grand Solution'
Those possible rippleeffects explain why policy makers won't let Greece default, saidCharles Diebel, head of market strategy at Lloyds Bank CorporateMarkets in London. He expects them to strike a “grand solution” inwhich richer euro countries such as Germany support the weak andbegin issuing joint bonds.

Policy makers “would only allow a Greek default if they thinkthey can contain the fallout, which is a dangerous presumption,”said Diebel.

If Greece, Ireland, Portugal and Spain all impose haircuts,European banks could lose as much as $543 billion with those inGermany and France suffering the most, according to a May report bystrategists at Bank of America Merrill Lynch.

Even those figures don't tell the full story because they omitindirect exposure via derivatives such as credit-default swaps.Economists at Fathom Financial Consulting in London calculated inJune that U.K. and U.S. banks hold such insurance on Greek debttotaling 25 billion euros and 3.7 billion euros respectively.Extend that metric to the whole European periphery and U.S. bankshave a 193 billion euro exposure.

'Even Worse'
Such linkages threaten an “evenworse crisis” than the folding of Lehman Brothers, said Scott. “Theamount of outstanding debt is more than with Lehman and we don'tknow the amount of derivative exposure.”

To support the financial system and stave off an economic slump,Carl Weinberg, founder of High Frequency Economics Ltd. inValhalla, New York, says governments must create a fund to injectcapital into banks as the U.S. did with its $700 billion TroubledAsset Relief Program.

“If banks fail, or if they fear big losses, they will stoplending,” said Weinberg. “As things stand today, a credit crunchwill corset euroland and a depression will ensue when Greece failsand takes out euroland's banking system.”

BofA-Merrill Lynch economist Laurence Boone calculates adisorderly Greek default with spillover into Spain and Italy couldmean the euro-area contracts 1.3 percent in 2012, using the LehmanBrothers episode as a benchmark.

Waiting for Surplus
Her “high probability”scenario of a Greek restructuring in 2013 when Europe's permanentcrisis resolution mechanism is operational and Greece is closer tohaving its primary budget in balance suggests growth of 1 percentnext year. The “increasingly likely” option of an orderlyrestructuring at the end of this year would mean expansion of 0.1percent, she projects.

Hanging over the debate is also whether Greece could default andremain a member of the euro area. Nouriel Roubini, co-founder ofRoubini Global Economics LLC in New York, proposes that default —and an end to debt repayments and required austerity measures — betwinned with an exit from the euro — an approach rejected byEuropean and Greek policy makers — to restore competitiveness anddebt sustainability.

Rebounds
After shrinking 10.9 percent in 2002following its decision to default and devalue, Argentina's economygrew eight years straight, exceeding 8 percent in every year asidefrom 2008 and 2009. Russia was growing in double digit just twoyears after defaulting on $40 billion of local debt in 1998.

In contrast, facing only hard choices, EU officials have takenhalf-measures in the hope that the situation would somehow turnaround, said Rodrigo Olivares-Caminal, senior lecturer in financiallaw at the University of London.

“What they have done so far is a patchwork approach,” he said.“Now things are much worse. It's becoming more expensive not onlyin economic terms but also in social terms for Greek citizensbecause now there will be redundancies, now there will be moretaxes there will be less jobs and things will get worse.”

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