The Greek debt talks fall apart

By Felix Salmon
January 24, 2012
The news out of Greece isn't good.

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The news out of Greece isn’t good. Remember here that Greece itself is basically just an intermediary, stuck between the Troika (EU, ECB, IMF) on the one hand, which is going to fund its deficits for the foreseeable future and therefore can demand anything it wants, and bondholders, on the other. And the problem is that what’s acceptable to the bondholders — a 4% coupon, basically, on restructured debt — is unacceptable to the Troika:

Euro zone finance ministers on Monday rejected as insufficient an offer made by private bondholders to help restructure Greece’s debts, sending negotiators back to the drawing board and raising the threat of Greek default…

Jean-Claude Juncker, the chairman of the Eurogroup countries, said Greece needed to pursue a deal with private bondholders where the interest rate on the replacement bonds was “clearly” below 4.0 percent.

In a way, this is a good thing, because it only serves to clarify the fact that Greece is defaulting in a way that’s going to make its bondholders very unhappy. All the talk of a “voluntary” restructuring was a way of attempting to paper over that fact, and that paper was always extremely thin. Maybe a bit of honesty will help people face up to reality in a way that they’ve been very reluctant to do until now.

Richard Barley has another idea which might help: the ECB could swap its Greek debt for EFSF debt, and then the EFSF could tender those bonds into the exchange. That, he says, could give Greece some €25 billion of extra debt relief, making the mathematics of a deal easier to work out.

I’m not entirely sure about this. The EU is already helping Greece enormously by funding Greece’s deficits going forwards. If the private sector were willing to do that, then it might not need to take such a big NPV haircut. Barley’s asking for Europe to both provide new money for Greece and take losses on the money it’s already lent, and I don’t see why Europe should have to do that now. Let’s do the private-sector restructuring first. The EU is surely going to take losses on its Greece loans at some point, but there’s no reason to do that at the same time.

No one thinks of this deal as a “one and done” restructuring. Bailing in the ECB or the EFSF at this point would just be denial: it would encourage the EU to think (or at least to say) that the Greek debt problem was solved for perpetuity, when it clearly isn’t. So let’s force the private sector to take its big NPV haircut now. And then the next step can come a few years down the road, when Greece discovers it can’t pay the Troika what it owes.


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People have no idea how long the road is down which the can can be kicked. A road stretching almost endlessly, evidently. It seems that Europe will be kicking the can for the next ten years at least.

Posted by Chris08 | Report as abusive

does this mean the ECB should accept that giant wooden horse the Greeks want to leave behind in Brussels?

Posted by Eastvillagechic | Report as abusive

There’s an old saying that if I owe the bank a million dollars, I have a problem, but if I owe the bank a trillion dollars the bank has a problem. In other words, Greece should be quietly preparing for a default (probably printing neoDrachma as fast as they can), but any pretense that they can avoid a default is only buying time.

Some industrious sort might be able to make money by finding out what the price of ink has been doing in Greece in the last six months. I’d expect it’s risen due to a big rush print job.

Posted by JayCM | Report as abusive

JayCM, when word leaks out that whatever currency-printing agency in the Greek government is buying printing presses and/or printers ink in large quantities, it’ll cause an immediate run on the banks in Greece as retail-level savers rush to get their Euro-denominated savings out and into other European banks.

The relevant government officials in Greece understand this, so they’d have to declare a bank holiday in order to prevent this. Of course, when word leaks out that the Greek government is announcing a bank holiday, everybody will assume its to facilitate a default and re-introduction of the Drachma. So there would be a bank run. The relevant government officials in Greece understand this…

Posted by Strych09 | Report as abusive

Words more true were never spoken, Felix.

Posted by breezinthru | Report as abusive

So who has the upper hand now, Felix?

Posted by TJ6 | Report as abusive


Let me propose an alternitve hypothisis for the break down in the talks… the Euro-banks and the Troika have come to agreement that the Greeks have wildly overplayed their weak hand.

A 75% loss rate on the debt of a 1st world democracy is without precident. The default will come in March… the French and Germans won’t throw good money after bad. The 2013 Greek budget will balance (at about 60% of 2011 spending levels) because there will be no new loans IMF or otherwise.

It will not be pretty… the new retirement age will be 75. Wages will fall 35%. Their will be riots and strikes… but 3 years from now things will calm down. $99 4-star hotel rooms and $10/fine dining will pull in tourists from around the world… cheaper labor will pull in new foreign direct investment… even manufacturing will relocate to cheaper eurozone labor. Life will go on!

Posted by y2kurtus | Report as abusive

I think Greece should lie to both sides, take the bailout money, default on the debt to everyone including the IMF, ECB etc and restructure it’s tax/expenditure system with the money.

Not sure it could get away with it, depending on who actually holds the cash while the deal is being done.

As seen on ZH – the math of more debt for Greece doesn’t work.

Posted by tqft | Report as abusive

Cure for falling off tall building — dig a deep hole where the person is about to land, then dig it deeper as fast as they can fall.

Best thing about this cure? When it fails (as ultimately it will), you have a ready-built grave.

The Greece “bailout” is a bit like that…

Posted by TFF | Report as abusive

if the greek govt had decided to exit the euro and default on its official debts, it would have no incentive to stop a run on its own banks. a bank run would allow ordinary greeks to preserve their purchasing power in euros prior to a euro exit. the redemption of deposits by greek banks would be funded by euro money created by the greek central bank. that in turn would be funded by credits granted to the greek central bank by the other eurozone central banks via the target2 system. following its exit from the euro, the greek central bank would simply renege on its obligations under target2.

Posted by benagyerek | Report as abusive