Much outrage from the usual quarters at this statement:
The credit rating agency said on Monday that allowing a debt rollover would amount to a \”selective default\” by Greece, undermining eurozone politicians\’ efforts to avoid such an outcome.
How dare a private company undo the hard work of so many politicians etc.
Thing is though, what do the contracts that were written before we thought there was going to be a default say about this? What is actually the law about this?
No, I don\’t know either, but I would assume that there\’s some listing of what \”default\”, \”selective default\” and so on actually mean with reference to these specific bonds. There are hundreds of pages of bumpf that accompany each issue after all.
Now, maybe it is silly that a voluntary extension of maturities is described as a selective default, with all the implications that has for whether the bonds (perhaps all Greek bonds?) can be used as collateral at the ECB etc. Maybe it isn\’t, again, I just don\’t know.
But I do know that I want whatever is in those contracts to be the criteria by which the issue is decided. For that is the rule of law. No, I don\’t want politicians and or bureaucrats to be able to just decide upon what is convenient at any time, I want the law to be written own, perhaps in a contract, perhaps in legislation, and then everyone has to act according to what has been agreed everyone has to act up to.
To do otherwise is to take us into the appalling miasma of rule by whoever gets to issue the dictats: not a notably democratic procedure nor, if truth be told, one that leads to a flourishing of freedom and liberty.
I\’ve no problem with people arguing, heck, even the law being changed, or the contracts being written, that future bond issues should not be in default if maturities are voluntarily extended. But currently extant bonds have to be treated under whatever rules the currently issued bonds were issued.
The whining about S&P seems to be coming from pretty much the same quarters as those who hail the \”legally binding carbon commitments\”. And I\’m sorry to have to tell you this folks but if you insist upon the law being followed in one area then you\’re duty bound to insist on it being followed in all.
No problems at all with attempts to change it for the future: but if you want to ignore the law on bonds now then what\’s to stop us ignoring the law on carbon later?
I don’t think it’s the contracts. Whatever they say, they can be varied by mutual consent, that is, “voluntarily.” you can’t have a default if there is mutual consent.
rather it’s the ratings agencies’ commitments, which could be in contracts or in published standards, to rate debt and debtors according to standards – x and y mean AAA, a and b mean CCC. it’ll be their definition of “partial default” which will drive their rerating of these instruments and borrowers.
the fun is watching people who two years ago were furious at the rating agencies for being in the pocket of borrowers and issuers, now being furious that the amn things are acting independently and not doing what they’re told.
S&P won’t budge, my guess. Things will get messy.
“To do otherwise is to take us into the appalling miasma of rule by whoever gets to issue the dictats: not a notably democratic procedure nor, if truth be told, one that leads to a flourishing of freedom and liberty.”
Which everyone from Christine Lagarde downwards is happy to do.
Whilst it’s both objectively and subjectively important for the Euro Zone Governments that the rollovers are not seen as a default, the real concern is from the writers of CDS contracts on Greek, Spanish, Italian, Portugese and Irish Government debt. For S&P to specifically identify the rollovers as a ‘default’ can be the trigger for point for CDS claims, and that is where much of the damage was done in 2008 (With the US Government funnelling resputedly USD$ 400 Bln through AIG to the investment banks to settle outstanding CDS on behalf of the insurer). And the biggest writers of Greek CDS ? – The big US investment banks ! That, in the short term, is why S&P’s interpretation is important.
Tim adds: Yes but….AIG was not making daily margin calls. So they had to come up with the money all in one go.
Now, everyone pays daily margin calls. So they’ve *already* handed the losses over. A default just crystalises this, not starts a run on hte banks.
Quite right, although it’s actually weekly calls for many. The credit event however can be the trigger for recognition of a larger magnitude loss than the previous week’s MTM position, and that is the fear (more sharp losses, rather than a a bank run). Plus the obvious fear of many writers with ending up with the deliverable on their doorstep, which they hold when the country eventually agrees to throw the towel in on EUR membership. Agree for now though that the ECB have no other choice than accepting lower and lower quality credit on collateral.
For anyone sad enough to be interested, these arethe best summaries I have seen:
Explaining S&P’s perspective:
http://www.nytimes.com/2011/07/05/business/global/05iht-euro05.html?_r=2&hp
And a slightly more sanguine outlook
http://www.zerohedge.com/article/guest-post-making-sense-french-rollover-plan