July 8, 2010
Default needed for Greece (and European Banks): Globe & Mail
Despite the constant denials from the eurozone banks and from Papandreou's government that a default is needed or even possible, this UK Globe and Mail article by Nouriel Roubini continues what seems to be the general opinion among financial experts outside of government and the banks: Greece has no choice.
"...The bitter pill of debt restructuring could be taken with appropriate sweeteners, such as credit enhancements supported by the IMF and EU. Certainly, it would be better to use a small amount of public money to tempt creditors into a pre-emptive deal now than waste €110-billion of it trying to prevent an unavoidable restructuring later. Such public resources would be better used to help ring-fence other embattled eurozone economies – such as Spain – whose debt may come under renewed pressure. "
...Of course, giving nations longer in which to pay and helping with generous rates mean creditors experience losses. But their loss is much less than under an outright default. Since the market value of their existing debt has already fallen sharply, there will be no additional mark-to-market losses either, which is part of the reason why these orderly restructurings saw the vast majority – more than 90 per cent – of creditors sign up.
Indeed, restructuring Greece’s debt should be even easier. In those three emerging market economies, public debt was issued in foreign jurisdictions – namely London and New York – creating a risk that creditors would hold out and sue to regain their assets, as sovereign immunity is limited in foreign courts. But 95 per cent of Greek debt was issued in Greece itself, where domestic sovereign immunity laws greatly reduce the risk of hold-outs and litigation.
Another advantage is that most of the banks holding Greek debt are keeping it in their “to maturity” bucket rather than their “trading book” bucket. So long as the face value of the debt is not reduced they can still pretend – as they are doing now – that it is still worth 100 cents on the dollar when the actual market value is already lower.
I think investors underestimate how badly the core EU system will resist a change like this, because the central tenant of the project is eventual full integration. Obviously, Greece leaving the system is exactly opposite of the goal. Some expect the eurozone to implement stronger monitoring and to try for even deeper presense within the economic mechanisms of member nations, or at least those now vulnerable (like Greece) who are trading some sovereign rights for financial help. But, just as investors underestimate the actual fortitude of the EU managers, the EU seems to underestimate national feelings of individual states. Already smarting from the IMF / eurozone imposed reforms, it would seem likely the Greeks would measure the benefit of hanging onto the eurozone versus getting back into full charge of their own fortunes, and find the latter more appealing.
Greece's Golden Visa program
