Investors face large potential losses on eurozone debt under German plans likely to win backing from EU leaders on Friday – risking a boycott of Greek, Irish, and Portuguese bonds.
The aim is to put into new bond issues an ability to ease the terms of a default. Most importantly perhaps, to aallow the majority of an issue to force a minority into a cramdown.
It all seems rather sensible really: except for one point.
We already have mechanisms to deal with sovereign defaults. These are messy, true, but they do exist and they do work.
And as to the solutions for the various eurozone woes, yes, haircuts and cramdowns are almost certainly at least part of it, if not all of it.
If we assume that the eurozone isn\’t to break up (which makes a great deal of sense to me, that it should, but I fear that politics will trump sensible economics or finance) and that Germany et al (including us of course) aren\’t going to pick up the bill not just for Greece, but Spain, Portugal, Ireland and, in extremis, Italy, then the only other solution looks like a partial default.
Which will mean those very haircuts and cramdowns for the bond holders.
All of which means that as long as these new rules are indeed only for new issues, fine, why not?