Amazingly weird column by Will Hutton


He seems to be blaming the opposition to a Greek haircut to bond holders on the banks.

Which is so weird as to be almost insane. It\’s precisely the banks, the financial traders, who all accept that there is no solution without a haircut to bond holders.

That\’s, after all, why the bonds are trading at levels which already assume a haircut.

The people against such a haircut are the officials: specifically although not exclusively, the officials at the ECB.

There\’s the usual bunch of \”Europe\’s Lovely\” tosspots, those who would do and say anything to preserve their dream of a more integrated continent. But the ECB\’s opposition to a haircut is easier to understand.

They own a huge chunk of that Greek debt. They\’ve bought it directly, to support the price. They\’ve also taken it as collateral for loans: the Greek banks have been parking Greek sovereign debt at the ECB and getting loans against it.

So, impost a haircut on the bond holders, the Greek banks all go bust, the ECB loses the loans and ends up with the collateral now worth say 50% of the loan it can\’t get back.

The ECB goes bust. And yes, the numbers are around and about large enough that the ECB would be bankrupted by a Greek haircut. Which is why the ECB is against such an event.

The alternative is to cut a grand bargain and to do so fast. Global finance has to accept it has responsibilities, not usurious claims that must always be met in full whatever the pain. Greece\’s creditors must accept write-downs and write-offs of their loans. In return, they should be allowed to swap their lending into new financial assets that they can freely buy and sell.

Yes Will, the private sector banks already know this and are quite happy, just fine, about it.

It\’s Greece\’s largest creditor, the European Central Bank, which isn\’t.

5 thoughts on “Amazingly weird column by Will Hutton”

  1. Okay, I’m not quite following, how can the ECB go bust? They own the printing presses.

    If Greece goes to the wall, French and German banks take the losses take and the ECB engages in a monetary expansion to pay its liabilities I’d be quite pleased.

    Where have i gone wrong?

  2. “Where have i gone wrong?”

    The ECB cannot print money unless the law changes. You might think that devastating the bourgeoisie by hyperinflation is a noble thing in the class war, but the Germans who lived through it twice don’t agree. They have a lock on the ECB and are certainly not going to allow facile socialist thinking to smash up their country a third time.

  3. Whatever you do or don’t do, you will end up in the same place. Greece can only not default if everyone else gives it a present. If Greece defaults, the ECB has no choice other than to print itself back into credit or to go to its shareholders (basically the governments in the eurozone) for the money – so you have a bailout whether you like it or not, whether through inflation, direct bailout, or indirect bailout.

    No one has ever previously complained about the ECB creating limitless credit – they did it to shore up the banking system post-Lehmann – just in that case there is a reasonable hope they get all the money back – with Greece it would be in the knowledge that that newly-created money will float around forever.

    The solution to the current problem is actually less important than seeing that Greece (and indeed every other government) stops living beyond its means in future so this kind of thing doesn’t happen again (rather, happens less frequently). So the idea of having bond issues for eurozone members overseen by a European “office for budget responsibility” isn’t all that stupid. And preventing the ECB from buying anything other than nominal amounts of government debt would prevent the kind of conflict of interest we have now.

    What the man on the Potsdam omnibus thinks is irrelevant. Merkel has shown herself to be an ineffectual leader who can be pushed over by anyone. I think she is now just wanting to not see things go bad on her watch – like Greenspan – and defer the problems until her successor is in power. Personally, lieber eine Ende mit Schrecken als Schrecken ohne Ende. It would have been better for all for Greece to default when its debts were half its current level. I take Tim’s point about the markets pricing a haircut, but it’s going to be more like 50% than 15%.

  4. I am not sure that Hutton is blaming the banks but I would blame them if they did hang out for a better deal. In any distressed debt situation there is a price that the market will take the crap off your hands and the face value that you can hold out for because that is what is what you are owed (with interest). Debt holders will always hold out for the latter right up to the moment that they sell.

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