The Great Debate UK

from Felix Salmon:

Could the EFSF engineer a Greek restructuring?

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.

The E.F.S.F. could then be the only remaining creditor of Greece and propose a bargain to the country: “We write down the nominal value of our claims (say, 280 billion euros) to the amount we paid (say, 150 billion euros) and extend all maturities (at unchanged interest rates) by five years provided you (Greece) agree to additional adjustment efforts (and asset sales)."

This should be too good of a bargain for Greece not to accept since it avoids default and saves the country 130 billion euros. While the E.F.S.F. exchanges the stock of Greek bonds, the International Monetary Fund could finance the remaining deficits in the usual way, with bridge financing until the fiscal adjustment is completed.

Nuclear plants aren’t the only meltdown worry in Germany

-

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.

from Felix Salmon:

Are Greek bonds pricing in a massive default?

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:

The fraught politics facing Lagarde

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:

The problems with a Greek “light dusting”

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 Felix Salmon:

Expecting an early Greek default

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".

The death of the euro is greatly exaggerated

-

-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.

Who is helping who in the China-Europe relationship?

-

-Kathleen Brooks is research director at forex.com. The opinions expressed are her own.-

PORTUGAL/

The saying goes that you only really know who your friends are during times of crisis. Well European officials must have been beaming after two of the world’s largest economies promised to purchase the debt of the currency bloc’s most troubled nations. China came out first and pledged to “support Spain’s financial sector”, through participating in its upcoming debt auctions. Likewise, Japan pledged to purchase a quarter of the upcoming euro zone bond sale that will help fund the bailout of Ireland.

from Felix Salmon:

Why Europe’s periphery should restructure their bonds

The drumbeat for debt restructurings on Europe's periphery is becoming too loud to ignore. The Economist has now come out strongly in favor; its leader gives the strongest case for biting the bullet now. And Mohamed El-Erian has now officially signed on:

You do not solve a debt problem by adding new debt on top of old debt. Yet it seems that European officials are fixated on this approach...

from Felix Salmon:

The US won’t default, even if the debt ceiling stays

Greg Ip makes a very important point today, which I haven't seen made anywhere else*: even if the US debt ceiling isn't lifted, that doesn't mean the government will default.

In any given month, the government's income dwarfs its debt-service obligations, which means that the government could simply pay all interest on Treasury bonds out of its cashflow. Greg hasn't run the numbers on principal maturities, but I'm pretty sure that they too could be covered out of cash receipts—and when that happened, of course, the total debt outstanding would go down, and we wouldn't be bumping up against the ceiling any more.

  •