A disorderly Greek default would cause more than a trillion euros ($1.3 trillion) of damage to the eurozone and could leave Italy and Spain dependent on outside help to stop contagion spreading, the main bondholders group has said.
Greek private creditors have until Thursday night to say whether they will participate in a bond swap that is part of a bailout deal to help it manage its finances and meet a debt repayment on March 20.
Investors will lose almost three-quarters of the value of their debt in the exchange. Finance Minister Evangelos Venizelos told Reuters on Monday it was the best deal they would get and those who did not sign up would still be forced to take losses.
Analysts said the Institute of International Finance document, marked "IIF Staff Note: Confidential," may have been designed to alarm investors into participating in the exchange.
"There are some very important and damaging ramifications that would result from a disorderly default on Greek government debt," the IIF said in the February 18 document obtained by Reuters.
"It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed 1 trillion euros."
If Greece misses the March 20 payment without a deal in place, this would be seen as a disorderly default and could be taken as a sign that politicians have lost control of the euro. Investors might then target other weak eurozone countries.
Spain and Italy might require 350 billion euros in outside support to contain the fallout, the IIF said, while the cost of helping Ireland and Portugal could total 380 billion euros over five years.
If the deal fell apart, the European Central Bank would suffer substantial losses because its estimated 177 billion euros exposure to Greece is over 200 percent of its capital base, the IIF said.
The bank lobby group, which helped negotiate the swap on behalf of creditors, also said bank recapitalization costs could easily hit 160 billion euros if no swap is agreed.
It could threaten the euro and would be a catastrophe for Greek living standards.
"Social strains (in Greece) would intensify as the economy reeled and unemployment surged from an elevated level already in excess of 20 percent," the report said.
"When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exit of Greece from the euro area, this financial shock to the ECB could raise significant stability issues about the monetary union."
A dozen major Greek bondholders, all on the IIF steering committee that helped draw up the deal, said on Monday they would support the swap. They hold about one-fifth of the 206 billion euros of bonds in circulation.
The remaining investors are under pressure to sign up.
Greece wants a take-up of 90 percent or more and if it falls below that but exceeds 75 percent it is expected to use collective action clauses (CACs) to force losses on those who do not volunteer.
Below that level, the deal could be off, potentially plunging the eurozone back into crisis.
The Greek finance ministry denied speculation that it was planning to extend the deadline on the offer, highlighting the jittery mood just two days before final decisions are due.
"Obviously the report is written on a worst case basis to try and encourage participation in the exchange," said Gary Jenkins, analyst at Swordfish Research.
"The most likely outcome may well be that Greece passes its 75 percent target and then uses CACs to ensnare the remainder."
Greece needs to reach that target to ensure it makes the budget savings agreed under its 130 billion euros bailout deal.
Venizelos has said he would not hesitate to activate the CACs. His deputy called them a "weapon" to help the exchange.
Using the CACs would probably trigger payouts on bond insurance contracts (CDS) and would also increase the chance of hedge funds or other bondholders pursuing legal action.
Complicating the process is the fact that 177 billion euros of the bonds fall under Greek law, and the remainder under English law.
The deadline for acceptances is Thursday, although the foreign law bondholders must hold approval meetings March 27-29 so they would settle at a later date.
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