Is a 68% loss on 200 billion euro Greek debt not actually a default?
Posted on 18 January 2012 with 3 comments from readers
Private creditors are apparently now close to a ‘voluntary’ deal with the Greek government that leaves a 68 per cent loss on the face value of their bonds, according to Bloomberg. Is that a default or not?
Technically it seems anything less than a 100 per cent loss is to be classed as voluntary. Yet how voluntary is that deal for the banks concerned with their arms twisted left and right by governments and central banks?
Haircut or default?
From 200 billion euros of bonds lent to Greece there will be 64 billion euros returned over time, although it is not clear if the present deal is for the whole sum or just those maturing in 2020. It is still a massive hole in the balance sheets of mainly eurozone banks that will constrain credit growth in Europe and deepen its recession.
At 68 per cent this ‘haircut’ is definitely at the very worst end of previous projections, except for the option of a complete disorderly default. In theory this does not trigger credit default swaps though if this is not a loss on credit issued what is?
And if this is the precedent set by Greece what does it mean for Portugal and Ireland, two other small and highly indebted nations who ought logically to follow this route to lighten their debt burdens?
Bank nationalizations?
There is going to be a bigger and bigger hole in the balance sheet of eurozone banks. Can they survive as private entities as these humungously large debts are written off? Wideranging nationalization still looks the only logical outcome rather than the total collapse of the eurozone banking system as an alternative.
We live in extraordinary times but the default by Greece is happening before our eyes. Like the emperor who wore no clothes in front of his people we are just not allowed to utter the obvious truth.
ECB President Mario Draghi says the economic situation in Europe is ‘very grave’. It’s an interesting choice of words meaning close to death.
3 Comments posted by readers:
the bottom for the GREEK DEFAULT, IMO will be in very shortly. The cyclical chart has been published but the short term, flow-of-funds chart shows what I mean very well.
http://denaliguidesummit.blogspot.com/2012/01/few-points-to-keep-in-mind.html
Can somebody please explain to me why the European authorities are obsessed with a voluntary restructuring of Greece’s debts. If banks have purchased CDS contracts to cover their losses surely it is not in their interest to accept a deal which does not trigger these contracts. It is like buying house insurance and then agreeing not to use it when your house burns down.
@Simon Bennett
I’m just guessing, but the banks are under the thumb of local governments and the ECB. Think back to what happened right after Lehman declared bankruptcy. Remember when Hank Paulson, the US Treasury Secretary, ORDERED all the heads of the largest banks in the USA to show up at the Treasury in Washington and FORCED them ALL to take money from the taxpayers. I have read that they were all told that they would not leave the building until they agreed to take the money. Since I wasn’t there, I can’t guarantee that is what actually happened, but I didn’t hear a lot of denials since that day.
Governments can make life a living hell for bankers that won’t play ball. If the banks are told to eat the loss, they will eat the loss, especially since they know that they may need a government bailout next year. Not to mention that they just got a half trillion euros (soon to go to a trillion) at 1% for 3 years. I would do what I was told if I could get that kind of deal !