January 23rd, 2012
Econintersect: Talks to avoid a Greek sovereign debt default have gone on all the past week. The write down of 22% of face value (the discussion point six months ago) and the more recent proposal for a 50% haircut have been replaced by as much as a 70% write down in the last three days. It now seems possible that the 70% haircut for bond holders may not be enough to put wings on the ‘Greece avoids default’ bird. The issue centers on reaching a deal where banks “voluntarily” write down Greek debt so that CDS (credit default swaps) written against Greek debt are not triggered. Such an event would have impact on U.S. banks which have written many of these “insurance contracts” that must be paid out if default occurs. (Photo from Athens riots in June. Click on picture for larger image.)
The intensity of the debt restructuring talks has intensified as the date draws closer for the January 30 EU summit. A means for Greece to handle €14.4bn in debt that matures on March 20 is the most urgent task at hand. But the task is complicated by the austerity imposed on Greece by the European Union, the European Central bank and the IMF (International Monetary Fund) which is pushing the country into a deep economic depression. Last year the Greek economy shrank by more than 6%. That makes the target of debt to GDP ratio less than 120% a moving one; the denominator keeps shrinking.
Greek bond holders have drawn a line in the sand, according to an article Sunday evening (January 22) by Peter Spiegel and Kerin Hope in the Financial Times. The final position for the banks given by Managing Director Charles Dallara of the Institute of International Finance (IIF) involved a haircut of 65-70% on Greek debt. This was the offer put on the table by the IIF on Friday evening.
The IMF asked Friday that, in addition to write down of principal, that the replacement bonds also take an interest rate cut of 50 basis points below what had been discussed previously. One banker, according to Spiegel and Hope, said that might have “put a voluntary deal out of reach.”
All this serves as background to the unusual position announced Friday by the IMF and ten other major international agencies warning against the bad effects of austerity.