July 4th, 2011
Econintersect: Last week the French (banks and government) proposed a roll-over of Greek debt into new bonds, some with maturities as long as 30 years. By Thursday German lenders, insurers and government agreed to join the plan, which would cover debts falling due from now until the end of 2014. As France and Germany are by far the largest Greek creditors, the world heaved a big sigh of relief as a Greek default was going to be avoided, at least temporarily. Stock markets around the world staged huge rallies. Armageddon had been avoided again. Follow up:
The IMF welcomed the move to extend the resolution of the Greek debt crisis as a move that would allow for creation of conditions for sustained growth and employment. The default of debt coming due and the imposition of extreme austerity on Greece was feared would create a spiral into severe depression. In addition, the resulting stresses on the Eurozone financial system would have far reaching effects. From the BBC:
The French plan is designed to make Greece's debtload more manageable in a way that would not be deemed a formal default.
If the deal is classified as a default by ratings agencies or credit derivatives traders, it could force European banks to recognise billions of euros in losses in Greek debts that they currently hold, putting their own solvency at risk.
But now Standard & Poors has thrown some sand in the gears that started turning just a few days ago. According to the Financial Times:
French and German banks’ plan to roll over their holdings of Greek debt suffered a blow on Monday as Standard & Poor’s, the credit rating agency, said the move would amount to a default.
The proposal to provide up to €30bn ($43.6bn) in financing for Greece had been made conditional on rating agencies not downgrading Greece’s debt. But S&P said on Monday that any rollover would be a “distressed” transaction and thus lead to Greece’s rating being lowered to selective default.
The FT article goes on to say that officials in both France and Germany said that such a move had been anticipated and "should have no immediate impact on credit default swaps (CDS) markets." Such a statement flies in the face of the rapid and extreme degradation of Greece's credit worthiness as seen in the following graph from Money and Markets:
Officials said that the important thing was to avoid a credit event like the one that occurred after the Lehman default when the entire labyrinth of CDS inter-relationships was feared to be blowing up. To avoid such an event it will be necessary to "persuade the ECB (European Central Bank) to take affected bonds in exchange for providing liquidity to Greek banks," one official said.
GEI Editor's note: The entire exercise appears to be one of confusing the boundaries between liquidity and solvency. It might be said that the plan is one that says "if we pretend the bonds have value then the bonds have value." This ignores the basic premise of GEI contributor Michael Hudson: "Debts that can't be paid, won't be." Hudson is not taking this proposition lightly - it is the title of his next book due out in a few months.
About 25% of the total Greek indebtedness is affected by the current discussions of a short-term fix. The following graph from the BBC shows the distribution among creditors of the $121.8 billion of Greek debt coming due over the next 3 1/2 years:
A number of economists and economics writers have written insightful analysis and opinion articles on Global Economic Intersection blogs. Below is a partial list. Further links to related articles are found at the end of each.
Bradley G. Lewis: