The Great Debate UK
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Hugo Dixon
Greece is likely to receive another short-term sticking plaster after the euro zone’s leaders stared into the abyss. But a repeat of the drama of recent days is all too possible. The region can, and must, protect itself against Athenian delinquency.
Euro zone finance ministers have postponed a final decision on extending 12 billion euros of emergency loans to Greece. But the country should get the next tranche of its EU/IMF bailout program in early July. Around the same time, the authorities should agree to a new package of perhaps 120 billion euros that sees Greece through until end 2014 –- with private-sector creditors helping by rolling over their debts in some yet-to-be-determined quasi-voluntary manner. Athens still has the capacity to mess things up if it can’t get its parliament to approve the new austerity program. But following Friday’s cabinet reshuffle, the government looks like it will at least survive a no-confidence vote on June 21.
Greece’s saviors have been willing to retreat from what were presented as red lines -- such as Gemany's insistence that private-sector creditors extend the maturity of their loans rather than roll over debts on a voluntary basis -- because they were so scared of the spill-over effects of a disorderly Greek default. Policymakers were right to be worried, but only because they have wasted the last year by failing to build adequate firewalls to protect against such a contingency. It’s not just Ireland and Portugal which could have been dragged down by a Greek bankruptcy. These small countries, which have already agreed to their own bailout plans, are no longer the real issue. Spain and even Italy, whose credit rating was placed on review for a possible downgrade by Moody’s on June 17, are the potential nightmares.
from Felix Salmon:
We're now close enough to a Greek default that the likes of Daniel Gros are coming up with schemes for how to avoid such a thing:
The European rescue fund -- European Financial Stability Facility, or E.F.S.F. -- should offer holders of Greek paper an exchange into E.F.S.F. paper at the current market price. Banks could be "induced" by regulators to accept the offer.
Having just got back from a couple of days in Hannover, I couldn’t help but be struck by the dominance of the local news agenda by two topics – and the almost complete absence of a third. Taking the British media at face value, I might have expected a city in near-panic, with people nervously scanning menus for safe dishes to order and maybe antiseptic handwashing facilities being hurriedly installed in public places. In fact, the town looked exactly as I remembered it from my last visit a few years ago, with E.coli rarely mentioned either in conversation or on the 24-hour TV news channels.
In fact, apart from endless replays of the goals from Tuesday night’s football (Germany versus Azerbaijan, a real clash of the Titans that must have been!), the news was all about the remote risk of a meltdown in the country’s nuclear power plants, and the anything-but-remote risk of meltdown in what is left of the Greek economy.
Another week another round of EU officials proposing solutions to the Greek insolvency problem.
First there was the President of the European Council Jean Claude Juncker who suggested that bond holders could be tempted into rolling over their maturing debt and buying more Greek bonds as long as a few sweeteners like higher coupon or interest rates were thrown in.
from Felix Salmon:
Martin Feldstein reckons that the market is pricing in a "massive" Greek default:
Even though the additional loans that Greece will soon receive from the European Union and the IMF carry low interest rates, the level of Greek debt will rise rapidly to unsustainable levels. That’s why market interest rates on privately held Greek bonds and prices for credit-default swaps indicate that a massive default is coming.
from Felix Salmon:
To get an idea of the job facing the new head of the IMF, check out Patrick Wintour's interview with Vince Cable, a UK cabinet minister who, perfectly sensibly, says that Greece is going to have to restructure its debts. Cable puts a positive spin on the idea: a "soft restructuring", he says, with Greece staying in the euro zone, could lead to a closer political union.
Then, read the story of what happens when you so much as suggest such a thing to Jean-Claude Trichet, eurocrat-in-chief. Even if you're from Luxembourg:
from Felix Salmon:
According to Christopher Whittall, "a consensus has grown among market participants that authorities will look to avoid triggering CDS when restructuring Greek bonds". Recall the inimitable language of Lee Buchheit, in his latest paper on how Greece might restructure:
The EU’s post-Deauville assurance that there will never be a restructuring of an existing Eurozone sovereign debt instrument (at least until 2013) presents something of an obstacle to any pre-2013 restructuring of Eurozone sovereign debt instruments. The face-saving solution may be linguistic. A voluntary liability management transaction undertaken by the debtor country before 2013, the argument goes, is not a “restructuring” as that term was used in the post-Deauville assurance. Restructuring, it may be claimed, connotes a degree of coercion on the affected creditors. But if the creditors themselves elect voluntarily to participate in a liability management transaction to improve the creditworthiness of their debtor, who in the official sector can or should gainsay that decision?
from The Great Debate:
Not a day goes by without a flood of comments on Greece and its debt problems. They seem to come from everywhere. Some are later denied while others are left to stand, accompanied by a continuous string of worrisome data. In the process, even greater disorder is gaining hold of the country’s debt markets, with credit spreads exploding in an ever more alarming fashion.
from Felix Salmon:
Greece is going to restructure its debts -- and it's going to do so before mid-2013. That's the clear message sent by the latest Reuters poll of 55 economists from across Europe: 46 of them saw a restructuring in the next two years, with four saying it would happen in the next three months.
This is a major development. The markets haven't believed Greece for a while -- but now they don't believe the European Union, either. Remember that back in November, the EU put out a statement laying out a mechanism for restructuring a member's debt "in the unexpected event that a country would appear to be insolvent". It clearly says that "any private sector involvement based on these terms and conditions would not be effective before mid-2013".
-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own.-
The Governor of the ECB, Jean-Claude Trichet has raised interest rates by 0.25 percentage points – and quite right too. For us in the UK, blaming rising prices on temporary disturbances in the world’s commodity markets is a figleaf to hide the fact that we are actually embarking on a partial default-by-inflation. For Europe, it is a different story. For one thing, the Germany-Austria-Netherlands bloc is, if not booming, at least chugging along at a highly respectable rate, and as the ECB Governor said today in response to a question about the impact of the rate rise on Portugal, his job is to set interest rates for the Eurozone as a whole, not just for the benefit of one of its smallest and weakest members.