Comments on: Restructuring European debt A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: southmed Mon, 13 Dec 2010 01:21:26 +0000 Sir,
I appreciated your article but let me express some distress about the focal point in discussion.
It seems to me that the particular problems affecting european countries right now are quite different among each other: can we talk about a unique sovereign leveraged debt burden ? it´s absolutely clear that debt leverage is not an exclusive euro-periphery problem.
Then a lot of emphasis has being placed on competitiveness and productivity but we should remember that these are long-term goals that must be adressed right now but which entails necessarily delayed results.

By: saucymugwump Sun, 12 Dec 2010 21:58:22 +0000 y2kurtus wrote: “When your old bonds get swapped for crappier new bonds or fewer new bonds you were not coerced you were robbed.”

Nonsense, it is capitalism; these bondholders chose the wrong bond. Why is this different than when someone bought corporate bonds with the corporation later going Chapter 7? If you cannot take the heat, stay out of the kitchen.

Iceland had the right attitude: stuff the banks and holders of debt. Customers will return; they always do.

They only reason this does not happen is that bankers are often very powerful people, knowing many leaders on a personal level. We need leaders with the courage to do the right thing; Angela Merkel is the best we have so far in the EU.

By: dWj Fri, 10 Dec 2010 19:45:06 +0000 The last comment is an interesting one. It has some merit to it, but it might also be the case that domestic political considerations — these are democracies, remember — will only allow a primary surplus when the countries have been cut off from new funding. Still, it’s pretty clear that, one way or another, any restructuring will be insufficient if the countries can’t maintain a primary surplus.

This might be grasping at straws, but when you mention that “European countries, if and when they default, will be the richest countries ever to do so,” I thought to King Phillip II of Spain. It’s hard to make comparisons across four-plus centuries, but it was a wealthy (by the standards of its time) country that restructured (multiple times) while largely maintaining access to financial markets. One big difference was that the lenders were not distributed; this might actually have made his job more difficult, and the moderns’ less. I’m also not sure how high his debt-to-anything ratios got before he defaulted. His domestic political constraints were certainly different from those of democratic leaders, but he was hardly an absolute monarch, and in many ways his situation might have been close enough.

By: rootis0 Fri, 10 Dec 2010 17:22:06 +0000 Sir,

It is too soon yet for the countries to default. They have to continue to slash spending for another few years.

The critical point will be when their ongoing deficits, sans interest payments, get to zero. That will be the time when governments won’t need the debt markets for new borrowing but only to roll over existing debt. That will be the time they acquire strong bargaining chips.

It is ironic but bond holders must initiate the restructuring now, they shouldn’t wait and risk losing the upper hand.

petar marinov
(san francisco, california)

By: y2kurtus Fri, 10 Dec 2010 17:06:17 +0000 Another fantastic article Felix. I agree that Barry’s explanation is spot on. If you can’t afford debt at your current level of income than you can’t afford debt at a markedly lower income.

One point I would make is that when you say: “in a market-friendly restructuring, old bonds get swapped directly into new bonds, with the implied threat that if bondholders don’t accept the deal, then the old bonds will simply default and stop making payments” that is actually by definition a “coercive restructuring.” The key is the implied threat. Any time an investor is making a decision under government imposed duress than they are being coerced.

What you call a “coercive restructuring” is actually a confiscatory restructuring. When your old bonds get swapped for crappier new bonds or fewer new bonds you were not coerced you were robbed.

Your choice at that point is to move on and accept what the robber has allowed you to keep or try your luck in international court. That process is sufficiently expensive and time consuming that most debt holders take the new bonds and make a mental note not to lend to that country for a few years.

Best hopes for goverments to effectively allocate the resources they have…. and to not allocate resources they don’t have.

By: Abulili Fri, 10 Dec 2010 16:39:44 +0000 I do agree that a restructuring is inevitable, unless the ECB will monetise the entire Euro-area debt. What intrigues me is what message that sends to other countries, especially developing ones, which are currently servicing their debt. No doubt many of them will scratch their heads and say to themselves: If rich and “respectable” countries like Greece and Ireland can default on their debt, why should we continue to pay? What are the odds of us getting away with a wee bit of a restructuring? Think of what we could finance in the way of election campaigns and other “goodies” if we could save on some of that debt servicing? End result? Vastly increased interest rates for everyone. How do we get out of this nightmare?