Is A Greek Default Inevitable?

No, it isn't.  But it may very well be desirable for all concerned, up to a point.

There are two extreme possibilities in resolving the Greek debt crisis:

• Plan A:  Massive default with near zero recovery for creditors and exit from the eurozone. 
• Plan C:  Massive Greek fiscal adjustment with murderous wage, pension and public service cuts, plus tax hikes.

Plan A puts the entire workout cost on the shoulders of  lenders.  Most of them are foreign banks that have posted their holdings as collateral with the ECB, and various public pension funds.  This makes Case A politically and strategically untenable, as lenders would then try to seize Greek financial and physical assets  wherever and whenever they find them,  freeze trade and generally bring unbearable pressure to bear.  ECB's balance sheet would take a huge blow and the euro could fall apart.

Plan C places the entire burden on the Greek economy.  This may seem fair at first.  After all,  it was Greeks who borrowed with abandon and squandered the money on overpriced houses, Olympic Games and a hugely bloated public sector.  Not to mention a thoroughly corrupt cleptocratic political system that is constantly in bed with a private sector that no longer produces much of anything at globally competitive prices.  

And yet.. it was foreign lenders who made all this possible, even though they knew - or should definitely have known - what was going on in Greece.  For example, it was foreign banks that kept buying Greek bonds at a ridiculously tiny spread of 30 bp (0.30%) over German bunds for years because they could post them as "cheap" collateral at the ECB.  What happened to their fiduciary responsibility?  It went out the window - the same window that allowed for the manufacture of poisonous AAA synthetic CDOs from CCC subprime mortgages.  It is ludicrous that such irresponsible practices should be rewarded post facto and their practitioners be made whole.

Therefore, I call for implementing Plan B, a solution obviously in-between A and C.

• Plan B: Share the blame and the cost, but not necessarily 50-50.  

My proposal (though obviously not my opening gambit at the inevitable bargaining table) would be to pay creditors a net present value of  65-70 cents on the euro through a combination of maturity extentions, lower coupons and outright principal reductions.  At the same time, I would demand the Greek government to implement at long last serious tax, pensions and public sector reforms in order to immediately (i.e. 2011) produce primary budget surpluses.

As part of the bargain I would also like to see all EU or eurozone countries exercise their right of eminent domain over their sovereign bond credit default swap contracts (CDS).  To wit, I would require all such contracts agreed under EU laws, or between parties domiciled in the EU, or their subsidiaries wherever domiciled, to be settled in case of default or other credit event, only by tendering the relevant bonds.  This would include all present and future CDS contracts.

In other words, all should share in the pain because all share the blame of creating and sustaining the debt bubble.
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Greek Debt Watch: 5-year CDS currently at 850 bp;   implies CPD of 72% if recovery is assumed at 65%