What is the Problem With the Greek Debt Deal?

September 28th, 2011
in econ_news

Europe-headache Econintersect:  Germany wants to protect it's taxpayers from having to pay for the burden of Greeks who avoid their taxes.  France and the Netherlands want to protect their banks who are overexposed to Greek sovereign debt.  Parts of the periphery beyond Greece are worried that the economic growth death rattle (austerity) may spread to them beyond what they are already contemplating.  And the rest of the world is watching a classic tragedy play out in a global amphitheater.  The Financial Times had a report yesterday (September 27) that says there are stress marks showing at the seams of the agreements to settle the crisis.

Follow up:

The stress marks revolve around what the writedowns will be for Greek bondholders.  Preliminary agreements arrived at a 21% writedown, apparently tolerable to the French banks.  That solution forced an extreme austerity on the Greek government and, if carried through would apparently be acceptable to Germany.  However, as reported by GEI News over the past two weeks, the bond market has priced Greek bonds much lower, with 50% and much larger discounts.  The banks are obviously not happy with a 21% haircut when marking the bonds to market would make them instantly insolvent.  The ECB (European Central Bank) is siding with France in this debate.

Germany is not happy about recognizing the market driven price for Greek debt, because that transfers a greater burden to core EU governments for which Germany carries the biggest share of the burden.  The Netherlands has been lining up with Germany.

Here is a summary from Market Watch at the Wall Street Journal:

Here is what the Euro-zone countries are divided over the terms of Greece's second 109-billion-euro ($148 billion) bailout package amid mounting concerns that Greece's funding needs have risen significantly over the past couple of months, the Financial Times reported Tuesday. As many as seven of the 17-member bloc are arguing for private creditors to take a bigger writedown on Greek bond holdings, the newspaper said, citing senior European officials. As things stand, hardliners in Germany and the Netherlands are calling on the private sector to take a bigger hit on Greek debt while France and the European Central Bank are resisting the move, according to the newspaper.

European and American stocks surged Tuesday inspite of the Financial Times report of discord.

Sources:   Financial Times, GEI News (here, here, here) and  The Wall Street Journal Market Watch

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