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Home > Blogs > Anthony Harrington > 30% debt “haircut” for Greece now seems a good bet

30% debt “haircut” for Greece now seems a good bet

Sovereign debt crisis | 30% debt “haircut” for Greece now seems a good bet Anthony Harrington

Shortly after the World Economic Forum in Davos in February, I highlighted the fact that there was much talk in the corridors of Davos about a deal that would see Greek debt extended for 25 to 30 years, with bond holders taking a 30% haircut. That story dropped out of sight after Davos but it has now resurfaced big time. In the run up to Easter the markets suddenly got the idea that Greece might be about to default over the Easter weekend and the interest on three year Greek debt shot up to 21%.

This is such a wildly unsustainable rate that its only meaning is to serve as a market shout, “DEFAULT COMING!!”, the equivalent of the cry soldiers give of “Incomingggg....” as they hit the deck. Greece did not default over the Easter Bank holiday and the Greek Prime Minister, George Papandreou and his finance minister, George Papaconstantinou, were left feeling considerable chagrin at having to explain to the markets, for the umpteenth time, that Greece would never, never, ever dream of defaulting on its debt. “Sure, right,” reply the markets and Greek debt gets whacked up another few hundred basis points.

Why do the markets feel this way? History and common sense is the answer. Some Greek politicians have already begun to point out that if a default is inevitable, then it would be far better for the country if it happened sooner rather than later. After all, they argue, what is the point of putting in a couple or more of hard years of austerity, with unemployment surging ever upwards while wages trend ever downwards, in order to stave off the horrors of default, if all that is being achieved is to kick the can further down the road. That’s the common sense part of things, and it is a powerful point which goes a long way to explain why Greece could rapidly become ungovernable for George Papandreou and party.

The second point, history, was taken up by Tyler Durden in his blog for Zero Hedge where he cites someone else quoting Citigroup: “... No country with a debt-to-GDP ratio of over 150 percent has ever avoided a default”. No country. Not one. Ever. But this time is different? Loud laughter from the markets, and up goes the Greek borrowing rate...

The key point here is that it doesn’t matter how much austerity Papandreou tries to inflict on his fractious country, as things now stand, i.e. without a Davos-like rethink (although the consensus is now for a much more severe haircut than 30% for those gullible bond holders – aka European banks), Greek 2012 debt, as Zero Hedge points out, is set to peak at 159.4% of GDP next year. (Why is it that I hear the intro to the Jaws theme tune behind these words...?)

With a Greek default now looking like an absolute racing certainty, that leaves the spotlight once again on those European banks (think household names) who are exposed - one could safely say massively exposed - to Greek debt. Obviously, they miscalculated wildly when they thought that the (now marginal) additional interest they were gaining on Greek as opposed to German bonds was only a notional risk, since the Greeks were backed by the euro, just like the Germans. What they have now rediscovered is something they should have known all along: namely that having a common currency does not mean that countries have equivalent economies.

The wonder is that they ever forgot this. What banker ever assumes that two corporates are equivalent for debt purposes just because they share the same national currency? Where the European bankers went wrong was in assuming that come what may peripheral debts would always be covered by the centre. That assumption, the markets are now bellowing, is no longer credible.

Further reading on the sovereign debt crisis:



Tags: bonds , Davos , euro , George Papandreou , Greece , Greek debt , Greek interest , sovereign debt
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