Greek Defaults etc

So, the Greeks have begged for help and they\’re getting it.

I\’m sure I\’m missing something this early in the morning. But what would be the problem if they simply negotiated a haircut on the bonds. Negotiated a partial default?

It wouldn\’t be the first time such a thing had happened, after all. Wouldn\’t be the first time for this specific country and we\’ve seen others do it in the past decade or two.

What I mean is, I\’m getting a little lost as to what would be all the terrible subsequent events?

Anyone able to help here?

11 comments on “Greek Defaults etc

  1. A haircut would mitigate or solve the long term debt crisis, depending on the size of the haircut but has at least three problems.

    First, no sane lender would lend to the Greek government for several years after such a default for fear of a repeat. Greece has billions of short-term debt maturing in the next year or two, so would need to borrow from the IMF / Germany anyway.

    Second, it would very likely bankrupt their banks whose assets (a large part of which are Greek government bonds~) would be haircut, but whose liabilities would not. Having bankrupt banks is a surefire route to economic catastrophe.

    Third, I imagine that a lot of Greek bonds are held by Greeks whose pension or whatnot has just been slashed, who would be out burning buildings in Syntagma Square PDQ. Default allocates all the burden of historical mismanagement on one set of people, bondholders, which is very unequal and probably unjust. Spreading the pain through spending cuts, tax rises, and perhaps some pain for bondholders is probably more just.

    Note also that the Greek government runs a meaningful structural deficit *even if it halved its interest payments* by haircuttng its debt by half (I am guessing these numbers but it’s probably in the ballpark). If that’s true then the debt is still on an explosive path even post haircut.

  2. Greek default would place the burden on bondholders. But how is that unjust? How is it just to put it on non-bondholders, who had nothing to do with it?

  3. Sure, ordinary Greeks didn’t cause the crisis though they did vote for the policies that led to disaster. Nor did bondholders cause the crisis, though – all they did was buy bonds!. That’s why it’s arguably more just to spread the pain of adjustment, as ‘guilt’ is so difficult to attribute.

    Every Greek benefited who paid lower taxes than their state could afford, or received higher state salaries than their state could afford ; most Greeks benefited from the bondholders’ naive willingness to lend to the Greek government & banks at German interest rates, as these low rates contributed to higher growth and asset values rising.

  4. Tim,

    I think the answer as to why this is different to previous episodes is not that Greece is different, but that the rest of the world is. There is a possible contagion effect on three levels: 1) The credibility of the Euro as a commitment mechanism like the Gold Standard to responsible policy falls 2) If it can happen in Greece, why not in other countries, and their borrowing rates will go up (we might be one of those countries) 3) The people who lose in a partial default might get in trouble themselves and cause a more direct financial contagion.

    Best,
    Matt

  5. P.S. I still think there are big questions to answer about this bailout package. Particularly that so many people think they will still default it could easily be good money after bad.

  6. Hey ex-locust – doesn’t caveat emptor apply to bondholders as much as anyone else? And it’s a direct responsibility, rather than the indirect responsibilities of the electorate.

  7. Vimothy is quite right – there’s a meaningful but not balance-sheet-breaking amount of debt on the books of a lot of quasi-State banks in Germany and France which creates costs to Germany and France of such a default.

    Niels – indeed the bondholders would not be able to cry foul if Greece defaulted, caveat emptor is spot on. As bondholders were the ones writing default insurance on the Greek state, they ‘deserve’ a beating in some sense. I only said that they didn’t cause Greece’s crisis, and don’t deserve it in the retributive sense of desert. Bondholders enjoyed interest on their investments, ordinary Greeks enjoyed too-low taxes (or not paying the taxes they should have), or too high public salaries – now it’s payback time and that payback should probably be shared between all the beneficiaries of the boom. As an aside, bondholders have got through the financial crisis remarkably well so far, with the public decisions not to haircut banks’ bonds when they went broke and no sovereign defaults (yet).

  8. There’s a distinct difference between borrowing with the promise “I’ll pay you back in a day, a year, or ten.” and borrowing with the promise “Somebody–neither of us knows who–who hasn’t even been born yet, will be demagogued and socialized into the belief that it is his civic duty to pay out of his earnings–whatever they might be–for things that were consumed by, essentially, unrelated people even many years previously–and which people ate “high on the hog,” drove autos, watched TV dramas and sports and who wanted to spend MORE very badly but not badly enough that they could even convince themselves that the expenditures were justified…unless paid for by some mighty rich or mighty greedy people who’d put up the werewithal for the frivolities only under the condition that repayment in the future was guaranteed by the “full faith and credit” of the government, which is just another way of saying “we’ll get it by hook or crook and especially by being legally empowered to simply take it by force from anyone not strong enough to resist our methods and forces.” And now, they want SYMPATHY (and their money) after the government has already explained to them what underlies its “full faith, etc.” (“Live by the sword, etc.” also seems appropriate at this point..)? What could possibly be more fitting than that folks who wished to be the government’s partners as they levied and levied upon the producers especially for the benefit of hordes of non-producers, should find themselves suddenly parted from some substantial portion of their accumulated wealth (after the fashion of many fools before them).

    Really–what distinguishes (in the U.S.) the run-of-the-mill bondholder’s penchant for lending to an entity that continually doesn’t repay but “rolls over” it’s debt load of astronomical size to a future in which only one thing is certain: its inability to pay off that debt. How is that lender superior to the entities that ate up the “toxic assets” in the mortgage market? Why should some of the players in a rigged game–and who are aware it’s rigged–get off and get “made whole” when the scam turns out to fail?

    In the early days of the U.S., Alexander Hamilton convinced a majority of his fellows that their country’s borrowing future was dependent on not “haircutting” outstanding bond obligations but honoring them in full. He was quite correct in that assessment and the U.S. bond rating advanced markedly. Less well known was that many of the very men voting for the full payout were themselves holders of the
    debt in question–it having been bought up by teams of agents they’d sent into the “bush” of the backcountry to scour for just such bonds, which could be bought for as little as 4 or 5 cents on the dollar (gradually rising to about 25 cents). As it was then, so it remains. (the only difference being that nowadays, a far greater percentage of the voters come from the percentage dependent though non-contributory.
    How can they not win?

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