Sarkozy to the rescue!

Pretty easy to do really, when you decide to use someone else\’s money:

The agreement, which has yet to be accepted by either Greece or the bail-out\’s donors, has been greeted as a crucial step forward in resolving the crisis and was drafted at a summit of creditors in Rome ahead of the Greek parliament\’s crucial vote on its austerity package tomorrow.

However, Mr Sarkozy\’s proposal is likely to set him on a collision course with Germany because it involves using Brussels-backed funds to reduce potential losses of private bondholders.

Although he said banks had agreed to \”roll over\” 70pc of the debt that matures before 2014 into new 30-year bonds, under the terms of the deal 20pc would go into AAA-rated assets fully protected against a Greek default and likely to be guaranteed by the European Financial Stability Fund (EFSF).

Using someone else\’s money without even asking them in fact.

For the EFSF is your and my money (don\’t for a moment believe that it\’ll end up just being eurozone taxpayers).

As to the larger point, having to \”persuade\” private sector creditors to accept losses, what, actually, are they on about?

I can\’t imagine that there\’s a single private sector creditor who doesn\’t already acknowledge that there is indeed a loss on their holdings of Greek bonds. The price in the market tells us that.

Some bonds are trading at 40% of par. Anyone who believed that there would be no default, with no loss of capital, would be buying those, driving their price back up to par. They\’re not: therefore everyone is accepting that there will be a loss.

So what is this whole kabuki of trying to persuade people to take a loss? Everyone already has taken a loss.

What is the political point that I\’m missing?

2 thoughts on “Sarkozy to the rescue!”

  1. The political point is that those bondholders, while acknowledging a loss as things stand, would rather like 100% reimbursement, not 40% or 65% or whatever, but they can only get that 100% – technically – from the debtor themselves since no market participant is going to be whacko enough to pay 100%.

    Lets take one fantasy solution as an example: Lets say Merkozy sets up the European Charitable Bond Buying Facility and buys the entire Greek debt stock at its current discount. Let’s imagine a further miracle and that next year Greece starts running a budget surplus. Now our charitable fund demands Greece starts running down its debt at its already-discounted price – being charitable and nice – it only wants what IT paid for the bonds, not their face value.

    If this happened, the former bondholders would go nuts. So actually various political solutions that might work, but will involve private haircuts, are politically unacceptable.

    The result is the only politically acceptable solution is a final bailout of some description (followed by Greece’s return to a balanced budgetr), or default.

    Oh, and I’ve changed my mind on Greek exit from the euro in the event of default. What will actually have to happen if there is a default is the ECB will have to print and reimburse bondholders to stop the banking sector collapsing completely. So magically creating €150bn or so just this once isn’t going to worry anyone very much – but Germans and others will be worried that it’ll keep happening, and hence there will be irresistible political pressure from other countries to chuck Greece out of the euro.

  2. The “persuade people to take a loss” is about trying to pretend the loss taking is not a sovereign default.

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