In praise of default
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Call me a default-ista.
For a huge number of borrowers, be they U.S. homeowners or the sovereign nation of Greece, a default or radical rescheduling of debt might just be the best, most practicable option.
More to the point, default in many of these situations may be not just in the best interests of the debtor but of the economy as a whole.
First, homeowners. Something approaching 50 percent of U.S. mortgage-holders are underwater, meaning the value of the property is less than the value of the mortgage. If a second leg down in housing is under way, that figure will get much higher and the distance to the surface much longer.
It is an axiom of mortgage lending that it is usually far better for the lender to modify, or to cut the principal or repayments, than to suffer the expense of a default. Yet, what few modifications are being done are usually not nearly generous enough to give the borrower an honest economic interest in sticking with the loan.
Many of these borrowers would themselves be better off with a default; better off not overpaying for an asset rather than renting more cheaply, better off because they are not in a stable enough situation for homeownership and better off because it would leave them free to pursue jobs and opportunities elsewhere.
Greece should default and reschedule
The drama unfolding in Athens contains all the usual ingredients for a modern crisis. Poorly disclosed derivative transactions. Inadequate accounting for off-balance sheet liabilities. Investment banks eager to structure complex transactions in return for fat fees. And a furtive but gullible government that thought it could get something for nothing.
Life is a lottery; some loans go wrong in the ordinary course of events. But behind every really bad loan or class of loans, like subprime mortgages, there are greedy and foolish bankers and equally culpable borrowers. Greece is no exception.
The Greek state has only itself to blame for manipulating accounting rules and derivatives markets to run up unsustainable debts. But the banks that structured those transactions are hardly blameless and cannot really complain if they do not get all their money back.
One part of the problem is the use of swap transactions to provide upfront payments to the Greek state in return for deferred payments, ensuring Greece would scrape in under the Maastricht criteria for euro membership.
Swap transactions involve the exchange of one stream of payments for another. But these are confidential bilateral deals. The terms need not be actuarially fair or at current market prices.
In this instance, the terms of the swap transactions ensured that Greece was a net recipient of funds in the early years but would pay the money back later.
These were credits. But because they were structured as swap transactions rather than loans they did not have to be recorded as debt or count against the country’s compliance with the Maastricht criteria for eurozone membership, which was precisely why they were so attractive.
I think all the bailing-out solution senario will be concerned with the profit.if EU can’t give their hands.the investbank will came out to creat some new tools to help them.and the asian financial crisis is hard to happen again.As it is Euro-zone not the Thailand or some small countries which are quite easier to be attacked by the hot money.if such expectations exists the IB will try their best to get a share of profit from the behavior of helping GReece.
coyotle, I think it’s just about possible that Gordon2352 was joking….