Well, yes, I suppose so

The trio repeated their demands three times with mounting tension. Each time she answered no, first in English, and then in German for precision, according to details obtained by Italy\’s La Repubblica.

\”Germany does not want the fund to spend billions in exchange for collateral from ruined banks. I don\’t see why we should end up holding bits of bankrupt lenders,\” she reportedly told them.

All three warned that if Spain is forced to request a sovereign rescue – as Germany demands – it will be deemed insolvent by markets.

Given that it would be insolvent this would seem fair and logical.

Then there\’s this:

A key reason is the cancerous precedent of the Greek haircut deal, in which private investors were left with all the losses. Once the ESM starts lending to Spain, others creditors are instantly pushed down the ladder or \”subordinated\”.

Losses will be larger if Spain ultimately needs to restructure. Stuart Thomson from Ignis Asset Management says this may well happen. He predicts haircuts of up to 50pc for Spanish bondholders.

Which is a reasonable working definition of the result of insolvency. Whether Spain really is insolvent (I think so but….) or simp[ly illiquid doesn\’t make much difference if the end game is 50% haircuts, does it? People will act as if it is insolvent and thus it will be insolvent.

5 thoughts on “Well, yes, I suppose so”

  1. None of these countries – not even Greece – meets the definition of insolvency (liabilities exceeding asets). They can’t stump up the cash because they don’t have sufficient INCOME. They have assets – far more than are needed to meet their refinancing obligations. But they either don’t want to sell them or can’t because no-one wants to buy them. And in the case of Greece, which is struggling to privatise state assets to raise money, a key problem is its awful bureaucracy which stifles any attempt to make money and therefore puts off potential buyers. It desperately needs to make a bonfire of red tape. Why doesn’t anyone talk about this?

    Tim adds: “It desperately needs to make a bonfire of red tape. Why doesn’t anyone talk about this?”

    Everybody does. This is what is meant by “reform”, the supply side reform of these economies. But that takes years to do, decades even.

  2. Suppose Germany offered to buy assorted Greek islands at a billion Euros each. Should Greece accept? Could anyone else in Europe reasonably object?

  3. @Frances Coppola: are you sure that the governments of these countries have physical assets that are greater than their liabilities?

    The UK government doesn’t for example. According to this (http://news.bbc.co.uk/1/hi/uk_politics/6316967.stm) it owns about £337bn worth of assets. Given it has liabilities of over £1tn in cash, and considerably more in future spending promises, does that not make it technically insolvent?

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