Understanding Greece’s default

By Felix Salmon
March 1, 2012

First, apologies for how Greece-heavy this blog is these days. There are other things going on out there, I’m sure. But we’re going through the largest sovereign default in the history of the world, and surprisingly few people — including senior European policymakers and journalists who are covering it professionally — really seem to understand what’s going on.

At the WSJ, for instance, the news story on today’s official ISDA determination (“Greek Deal Won’t Trigger CDS Payouts, Panel Says”) is bad; the blog post about it by Charles Forelle (“ISDA’s Greek Ruling Not the Last Word”) is very good.

And in Europe, the range of sophistication within policymaking circles is even greater. At the lowest, most basic level, one finds a feeling that it’s a Bad Thing if a European sovereign nation were ever to default, and so therefore it would be a good thing if the bond exchange was organized so that there was no official market determination of default. (Never mind that Greece is already in selective default on its bonds, according to S&P.)

At a slightly higher level of sophistication one finds the short-sellers-are-bad crowd, who don’t like CDS because they allow hedge funds to easily bet against countries. If the messy Greek CDS situation helps to reduce the amount of trust that the markets have in sovereign CDS generally, then so much the better, on this view.

And then, finally, there’s Peter Eavis’s conspiracy theory: if the Greek bond exchange goes really smoothly, and the sun rises in the morning and Italian bond yields stay below 5%, then maybe that’s the most worrying outcome of all. Because at that point Greece will have managed to wipe out, at a stroke, debt amounting to some 54% of GDP. You can see how Portugal and Ireland might be a little jealous. You don’t want to make sovereign default too easy — not least because it would do extremely nasty things to European banks’ balance sheets.

That said, Greece has now broken the sovereign-default taboo; many countries both inside and outside Europe have way too much debt; and now that debt relief is an option for politicians to seriously consider, it’s pretty much certain that at some point another European government will end up choosing that option.

So it’s extremely important for European politicians and voters generally to really understand what’s going on here, rather than just a relative handful of financial-market sophisticates. Greece’s default was a drastic move, and Europe has semi-officially said that it was a mistake: once we’re done with Greece, they’ve said, we’re not going to ask any other European country to similarly write down its private debt.

But the cat’s out of the bag now. Greece had no choice but to default. Portugal and Ireland do now have the choice. And while the cost of default is large, so is the cost of carrying a whopping great debt load. It’s up to the leaders and voters of those countries to determine which is the least bad option.


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Thank you Felix for switching over to Youtube. Not sure when you did it, but I always had technical trouble watching the old videos when they were self-hosted by Reuters.

Posted by cooperowl | Report as abusive

To be honest I’d have preferred you not interrupting him so often – because I was concentrating on what he was saying, I didn’t listen to your interruption, and couldn’t hear his endings or “…which means that…” continuations. At the end of the clip all I can remember is you like waving your arms around, and the look on the bloke’s face showing he realised you weren’t a serious interviewer.

Pretty poor stuff Felix.

Posted by FifthDecade | Report as abusive

Felix, you keep on going with “flooding the zone” with greece coverage.

Because if the greek default happens and we have a major stock or bond market crash, some people will be wondering “what happened”, but not those who have been reading your blog.

Posted by Strych09 | Report as abusive

the interview worked well – glad your IQ evolved past ducks and legoland

yes, everyone lapses into idle speculation because apokalypsia `ellenika didn’t arrive

jealousy for greece? ireland has more guts and integrity than falling hysterically on the floor, molotov in one hand and camp wehrmacht costume in other, threatening to implode

Posted by scythe | Report as abusive

the Irish interest payments on government debt are a lower GDP fraction than for Germany. Do the numbers, Felix

Posted by genauer | Report as abusive

I also greatly enjoy the Eurozone coverage on this blog, Felix.

I especially enjoyed the CDS timeline you provided and your thoughts on the sovereign CDS market from a previous article. Fascinating stuff, really.

Posted by breezinthru | Report as abusive

You’re rather cavalier with the criticism, Felix. How about elaborating about the mistakes you casually allege others to have made? That will let us poor readers judge for ourselves — and let others defend their work, if they care what you say.

Posted by MBS83 | Report as abusive

Hi Felix, I am glad that you’re writing nonstop about Greece. I hit my update feed button about 14 times a day to see if you’ve written anything. I like your mix of facts + opinions. I scan WSJ then come straight to you for detail.
I have been reading some of the others you suggest as well, so thank you for those links too. I am relying on you for this coverage so please keep it up.
PS I wonder if you ever sleep btw.

Posted by Kathryn1977 | Report as abusive

The attempted covering of a Greek default is the largest exercise in moral hazard in the history of the financial markets. This will spur defaults all around the world and lead to defaults by Portugal and others.

Why should the Portugese continue to suffer under their program when the Greeks, who fudged their books to get into the EU, get a free ride?

Posted by dcurban1 | Report as abusive

Felix, don’t worry about overdoing the Greece coverage. This is the internet. If I want other stories I can find them. A journalist who develops some real expertise about sovereign defaults is more valuable, and stands to benefit when Portugal and Ireland go south. And Spain, Italy and France. And the US. You should have fairly good job security, is what I’m saying.

Posted by JayCM | Report as abusive

Yep – Greece’s default is Pandora’s Box. The lid is open and you can’t shut it now. This is going to bring down the entire financial order of the West because there isn’t enough moolah to cover all the sovereign defaults that are just waiting in the wings.

All we did 3 and 1/2 years ago was transfer to the sovereigns the massive private debt that defaulted in the crash of 2008. That is now breaking the camel’s back, since most over-developed sovereigns were already on trajectory toward having their backs broken before the crash of 2008 came along.

It’s ‘prophetic’, if you will, that the collapse of western democratic capitalism should begin, be triggered by, the default of Greece, the Mother of Democracy. It’s 1989-1991 for western capitalism.

Posted by NukerDoggie | Report as abusive