Success in the Greek part of Euroland means not paying savers back their money

Today’s news that the Greek debt reduction has attracted the support of 85.8% of the bondholders is what passes as a success these days in Euroland. The Greek state can now use the collective action clause to make all bonds held under Greek law convert to the new terms. The Greek government claims it will hit the IMF/EU targets for debt reduction through debt restructuring. Bondholders are being made to pay some of the bill of Greek excess spending in recent years.

Each bondholder will receive 15% of their money back in a cash equivalent, and 31.5% of the face value of their bonds in the form of a new 30 year Greek bond paying just 2% at the outset, rising to 4.3% over its lifetime if all goes well. The stated reduction in bondholder wealth is therefore 53.5%. However, the new bonds are unlikely to be worth their par value. Early indications are that Greek debt will continue to change hands on very high yields, meaning if a bondholder wants to sell their new bonds they will have another large loss. They might lose threequarters of the par value on the new bonds, taking their full loss to around three quarters of the capital value at the issue price of their original bond.

Individual investors of course may have lost a lot less, as they may have bought in at much lower prices, and will have received some income. The government is also offering sweeteners in the form of the promise of extra payments if the Greek economy grows well in the years ahead. These probably have little value today, though we all hope for the sake of Greece they do in due course become more valuable.

Whilst many are treating this outcome with relief, it is scarcely good news. An advanced country and a member of the Eurozone has failed to repay its debts. Markets still do not trust fully the new debt instruments the Greek state is issuing. The Greek economy, deep in recession, has just lost more potential spending power from private sector holders of these bonds. This follows hard on the heels of the extraordinary decision to cut the minimum wage by 22%, the minimum wage for young people by 32%, and some of the pensions in payment by 12%.

Greece is an extreme example of how a western economy locked into a single currency has to slash living standards to try to live within its means. After years of building up debt, the country faces the reality that no-one wants to lend to it on anything like normal terms. Inside the Euro all the adjustment has to take place by some combination of smarter working, job losses, wage cuts, and in extreme cases failing to repay debts. The Greek decision to make bondholders take very large overall losses is just part of the huge price the better run members of the Euro and many prudent savers in Europe are now paying for Greek membership of the currency. It would be better if Greece left the Euro as soon as possible, to help them and to help the reputation of Euroland.

The Greek debt swap is seen as a success, but it is part of a much larger painful adjustment which is far from over. Portugal should be worrying, as they are still a long way from being able to return to the markets to finance themselves in the normal way.


  1. Brian Tomkinson
    March 9, 2012

    Why should anyone want to lend money to countries such as Portugal, Spain and Italy when the Greek example has shown that in euroland the chances of you ever being fully repaid are nil? Not many lenders I should think, except, of course, for the politicians and central bankers who will think nothing of fleecing their own taxpayers to keep their “project” alive.

    1. APL
      March 9, 2012

      Brian Tomkinson: ” when the Greek example has shown that in euroland the chances of you ever being fully repaid are nil?”

      Same story in the Sterling zone, government policy over the last century is to utterly destroy the currency so that today a twenty minute bus ride costs £1 7-/-

      In 1910, a working man could feed a family for a week on that.

      1. Bazman
        March 9, 2012

        Who’s got the cheese then. The poor?

      2. Denis Cooper
        March 10, 2012

        It’s only the same story if you think that suddenly losing half of the money you possess would be the same as having its purchasing power eroded to a similar the same extent over two decades, during which period in most cases your income and the value of your assets would gradually increase to counter that depreciation. Or suddenly losing three quarters of your money, as seems to be the case for investors in Greek bonds, rather than having its purchasing power gradually eroded to the same extent over three decades thanks partly to OPEC bumping up the price of oil.

        I don’t see them as being the same story at all, and while I’m against the government allowing inflation to get above minimal levels I’d still prefer to have the government pay me the agreed sums of money in full and on time and accept that the real value of that money will be gradually declining, rather than have the government default and tell me that I’m only going to be paid a fraction of what was originally promised.

        1. APL
          March 11, 2012

          Denis Cooper: “I don’t see them as being the same story at all, ”

          Ok, but in the first instance you get your money back but can only buy 10% of the value of a thing when you lent it to the government.

          And in the second instance you only get 10% of your money back.

          Big difference.

          Denis Cooper: ” I’d still prefer to have the government pay me the agreed sums of money in full and on time and accept that the real value of that money will be gradually declining, ”

          I’d prefer to get my money back, the interest the government agreed to pay me and its original purchasing power.

          But that’s a matter of preference.

        2. APL
          March 12, 2012

          Denis Cooper: “during which period in most cases your income and the value of your assets would gradually increase to counter that depreciation.”

          We are also finding out that ones income hasn’t really increased and didn’t really counter the depreciation nor have your assets – property or residence really appreciated to counter the government instigated depreciation.

          In fact the only things that have increased in value are things the government hasn’t really had much to do with, other than tax the billy out of them, I can think of computers and holidays.

          In the ’80 a friend told me he had bought his first house, standard three bedroom semi, for £1000. He had to move quickly because it had recently doubled in price.

    2. lifelogic
      March 10, 2012

      Cameron probably will “lend” but won’t be using his money I suspect.

  2. Disaffected
    March 9, 2012

    Any body/organisation with any sense would be selling all sovereign debt in the Eurozone relating to Portugal, Spain, Italy Greece and Ireland. Where are the voices of concern from our parliament????? Is this any different from the actions of dictators? Should Mr Cameron be mounting a war campaign as he normally does in this sort of situation?

  3. lifelogic
    March 9, 2012

    Indeed an how a western economy, locked into a single currency, has to slash living standards to try to live within its means and give up democracy too.

    Worse even than Major’s idiotic ERM experiment. All this was very clear, and indeed was pointed out at the start of the EURO and the ERM. Why on earth then were most of the Labour Party, all the Libdems, all the visible BBC, ,many BBC think economists and well over half the Tory party in favour of the UK joining too? Why on earth are some of these people still in positions of power, in government, in the Lords or at the BBC trustees? Have any said sorry or explained why they were so wrong?

    Why does Cameron still seem to be following them? How are Osbourne/Darlings PIGIS investments doing? Are they down to say 15% of the money invested yet? I am sure all the tax payers are delighted this tax donation and feed the Pigis policy.

    1. uanime5
      March 9, 2012

      Greece would have to slash standards and have to live within it’s means even if it wasn’t in the Euro, unless Greece wants to constantly devalue the drachma.

      1. stred
        March 9, 2012

        Yes. The ordinary Greeks who have lent money to their Government will now lose their savings. Euro banks will be able to bail themselves out with cheap loans from the ECB and lend it back to governments at a profit. And all the government employees in Greece and Euroland will be protected. While the farmers and restauranteurs will have to lower their earnings. In the UK this process is done by QE , inflation and negative savings.

        1. Bazman
          March 9, 2012

          Never expect to loose money by backing the government/state though. I’ll get me gun..

        2. Caterpillar
          March 9, 2012

          Stred seems to be spot on here. It is ludicrous to call the Greek haircut a success, but at least it is far more transparent then the QE/inflation/saver theft carried out in the UK.

    2. Disaffected
      March 9, 2012

      No recourse to the judiciary or to so called sovereign parliaments. The Eurocrats just went ahead and robbed billions to keep the EU dream alive. Where is the UK taxpayers’ money?? And recently Osborne was talking about giving Greece more through the IMF!

      Come back Gordon all is forgotten. The rich boys cannot add up. 5.2% pay rise for welfare lifers next month while pensioners and savers get robbed through QE. When is Osborne going to come clean about robbing the squeezed middle and pensioners through QE and inflation?

      1. Disaffected
        March 9, 2012

        Ordinary hard working people cannot afford the new socialist Tory party. They are the party for welfare lifers and a socialist European takeover.

  4. Antisthenes
    March 9, 2012

    “Greece is an extreme example of how a western economy locked into a single currency has to slash living standards to try to live within its means”

    It is not just the single currency but also having an economic and social model atrocious as it is is not that much worse than that of the EU and it’s member nations. This living within ones means is going to become habit forming and many Europeans are going to have to do exactly that before this crisis is over.

  5. James Reade
    March 9, 2012

    Ah, another situation where despite me repeatedly telling you that you simply are wrong in your assertions, you carry on. And you wonder why I accuse you of misleading people.

    Greece would not benefit from leaving the eurozone, and Greece would not have avoided debt problems had it been outside the eurozone. It would have accumulated debt in foreign denominations outside the eurozone and hence its depreciation on hitting its crisis would have led to that debt ballooning. That devaluation would not have achieved the required relative changes in real wages needed for Greece to restore competitiveness, just as it has never worked for the UK over the years.

    The eurozone will also not benefit from Greece leaving, it will disintegrate and cease to exist. The eurozone only functions (arguably: functioned) because the fixed exchange rate was believed to be irrevocable. No exits, as William Hague recently (finally) noticed. You can see the impact of the loss of this belief on interest rates here:

    Once Greece leaves, then speculation will turn to the next member, until it leaves. And the next one. And so on. The euro will essentially cease to exist, or be any different to the myriad other failed fixed exchange rate systems of the past.

    If you want that (which I know you do), then fine. But let’s have some honesty; just admit that instead of cloaking your advice behind sincere sounding platitudes.

    Reply: If Greece could devalue her Greek denominated debt – which is and would be the overwhelming majority of her debt – would devalue too. More importantly, her export prices would fall and her import costs rise.

    1. Mike Stallard
      March 9, 2012

      Didn’t you consider the democratic deficit?
      Running your own country into very heavy debt – as Britain has done and is continuing to do – is one thing.
      Being run into unpayable debt and then being ruled by an unelected government imposed from outside is quite another.
      No wonder the starving, unemployed and humiliated Greeks are angry! Over the centuries they have had a belly full of foreign government.

    2. zorro
      March 9, 2012

      Ouch!….15%, a lot less than they initially hoped but around what could reasonably be expected, a sort of IVA really, with a 30 year promise which I wouldn’t hold out much hope for…

      James, you shouldn’t be too disappointed or negative. I actually think that there is a reasonable chance that the Euro will survive just with fewer members. They will adjust monetary/fiscal policy to ensure that it does. Surely all this does is prove that it was a monumental mistake to allow these countries to join such a strict financial system without ensuring that they properly fitted the criteria. All totally foreseeable….it might be disappointing for EUphiles (just like you) that their EU superstate might not quite work in practice, but you can’t buck the market or drag people where they do not want to go.


    3. JimF
      March 9, 2012

      Surely this is rubbish.
      Pre-Eurozone membership, the majority of Greece’s debt would have been in drachma, which would have limited their borrowing capacity and enhanced their ability to pay it back via devaluation and inflation (cf Euros).

      1. uanime5
        March 10, 2012

        Unless they money they borrowed was euros or dollars, in which case devaluing would make their debts larger, not smaller. Most banks lend to countries in a euros or dollars to prevent a country devaluing its way out of debt.

    4. uanime5
      March 9, 2012

      John unless Greece’s creditors are willing to convert Greece’s debts into drachmas Greece won’t be able to devalue it’s way out of debt.

      While rising import prices and falling export prices can help a country it’s not a magical solution that fixes every problem. There are three occasions when it will make the problem much worse.

      The first occurs when a raw material cannot be produced within the country and has to be imported. As Greece has to import oil if the drachma devalues fuel costs will greatly increase.

      The second occurs when industries in a country need to import a large volume of raw material for their exports. An example would be a country that has to import a large amount of cotton to make cheap t-shirts. Raising the cost of imports and decreasing the cost of exports inflicts two hardships on these industries.

      Finally it can cause price spikes in raw materials, as the value of these materials is determined by the global economy.

      For example lets says Greece leaves the Euro, recreates the drachma, and has it devalue so every Euro is worth 2 drachmas. So from Bulgaria’s perspective Greek wood has halved in price, so Bulgaria imports large volumes of Greek wood. Bulgaria can purchase large volumes of Greek wood because it can outbid Greek companies due to the strength of the Euro. As there’s less wood available in Greece it raises the price until there’s no difference in cost between Greek and Bulgarian wood (the Bulgarians will keep paying a higher price until they have no incentive to purchase Greek wood instead of Bulgarian wood). Bulgarian companies are fine as they’re paying the price they used to pay for wood but now Greek companies have to pay a much higher price for their wood because the global economy has set the price of wood. Due to the higher cost of raw materials and lower value of their exports many Greek companies will go bankrupt.

      Reply: Most Greek debt is owed to Greeks so they would just have to take the devaluation hit, as they have taken the write down.

      1. Richard
        March 10, 2012

        You’ve forgotten to allow for the next stage in your Bulgaria versus Greece wood scenario.
        This is where consumers of wood reduce their demand for it because it is expensive.
        They switch to other alternative fuels or building materials which are cheaper.
        Greeks will soon realise there is a good price to be had for satisfying the demand for wood and they will cut down their forests and plant new forests which reduces their imports, creates employment for Greeks and satisfies domestic demand.
        As demand is met the price of wood will decrease and if there is a surplus of wood Greece may even be able to export and gain valuable foreign exchange

        Never underestimate the ingenuity of mankind to react to market movements.

        1. Richard
          March 10, 2012

          Posted in the wrong place

        2. uanime5
          March 10, 2012

          Once the Greeks produce more wood and the price falls the Bulgarians will start outbidding the Greeks and raise the price again. The only way the Greeks can sell wood at the original price (pre-Bulgaria raising the price) is if they can produce enough wood to satisfy the demands of both Bulgaria and Greece.

          Of course the low price of Greek wood may encourage other countries to purchase their wood from Greece so if Greece wants to keep the price of wood at the original price it will need to produce enough wood to satisfy their demand as well. While it isn’t impossible for Greece to keep wood at the original price it’s more likely that the price of wood will rise.

          The point I was trying to make is that if Greece devalues its currency it may produce fewer manufactured goods or more expensive manufactured goods because other countries are purchasing raw material from Greece.

          In this example the Greeks were producing their own wood so they didn’t need to import it. As the Bulgarians were importing wood from Greece, Greece was already exporting wood to Bulgaria. Also the effect that transportation costs have on the value of the wood were not considered and would have reduced the amount by which the price could rise.

  6. oldtimer
    March 9, 2012

    It is a success only in the sense that the default has been orderly rather than disorderly. If it looks like default, talks like a default and walks like a default, it is indeed a default. And I suspect that it wass pronounced “orderly” only after a lot of guns were pointed at lot of heads – Greek politicians and many banks chiefs among others.

  7. Kevin Ronald Lohse
    March 9, 2012

    Unfortunately. Mr. Redwood, success in the UK means so debauching the currency by QE that domestic savers cannot find rates of interest that at least covers the rate of inflation, because the borrowing requirements of the Banks are met by printing money rather than raising capital.

  8. Leslie Singleton
    March 9, 2012

    Is it the case that there are Banks and Investors out there (other perhaps than Greek Banks and Investors) that were (and are?) prepared to make loans under Greek Law? Can this be true?

  9. Denis Cooper
    March 9, 2012

    My understanding was that investors who bought the Greek bonds when they were issued would lose about three quarters of the promised value, overall, not about half as some sections of the media have been saying.

    That’s more or less what is says in this report:

    “Under the biggest sovereign debt restructuring in history, Greece’s private creditors will swap their old bonds for new ones with a much lower face value, lower interest rates and longer maturities, meaning they will lose about 74 percent on the value of their investments.”

    Which report also says:

    “Markets showed investors have no faith that the bond swap will draw a line under the country’s troubles. Under Greece’s austerity and reform programme, its debt burden in 2020 should fall to where Portugal’s is now.

    If investors believed Athens could succeed, yields on Greek and Portuguese bonds should be similar. But on the grey market, the new Greek bonds were yielding 17 – 21 percent, far above Portuguese levels around 11 – 14 percent.”

    Elsewhere I’ve seen that translated as the new Greek bonds trading at about 20% of their face value, with many investors anticipating that in the end the Greek government will be forced to default on those new bonds as well.

    Obviously it’s complex and uncertain, but on that basis a passive investor who bought the old bonds at issue and then swapped into the new bonds could finally get back just 5% of what he originally expected, ie his capital returned with the promised interest.

    One might ask whether it wouldn’t have been simpler, more honest and more effective for the Greek government to simply renounce all its existing debts in one go, make a clean sweep and start again.

  10. Pericles
    March 9, 2012

    As suggested by oldtimer, the 85% figure reached is an illusion :  the fantasists of Euroland would have accepted any proportion of her private creditors that had agreed to ‘take a haircut’ ;  nothing may be allowed to interfere with the continued existence of Euro.

    The tax-payers of those countries that maintain fiscal prudence, including E.U. members not using the Euro, will continue to pay through the nose for the preservation of this bastard currency till some-one with true grit – and I can hardly be referring to Mr. Heath Mk. II or, as he prefers to be known, the First Lord of the Treasury – loose the Gordian knot.


  11. uanime5
    March 9, 2012

    If Greece devalues it’s currency won’t the bonds also be worth less money? If so then not being locked in a single currency wouldn’t help Greek bondholders. Being in a single currency may even provide bondholders with some protections as Greece is very unlikely to go bankrupt; which would make the bonds completely worthless.

    1. Disaffected
      March 9, 2012

      The failing and predicted economy of Greece makes the bonds worthless now.

  12. Richard
    March 10, 2012

    It is one of the wonders of modern politics, that when the Common Market was first proposed in the 1970’s, right wingers were generally pro and the left were against.

    Now the left are very strongly pro and the right are against.

    I look forward to a time when left and right agree that the EUSR is failure.

  13. Tedgo
    March 10, 2012

    Of course its the tax payers round Europe and beyond who will pay for all these losses. The banks and hedge funds will simply offset their losses against other profits, so reducing the Corporation tax take across Europe.

  14. Rick Hamilton
    March 10, 2012

    What is staggering about the Greek situation is that apparently nobody is being held responsible for the mess they are in. No doubt the politicians who so recklessly threw away billions of public money are now comfortably retired on guaranteed pensions and are working on memoirs entitled ‘Lessons Have Been Learned’.

    Why should wastrels on a monumental scale walk away untouched while ordinary voters pick up the bill? We will not avoid future disasters of this kind until pols become financially accountable. Putting up a bond of say half their personal assets to be forfeited in case of gross negligence with public money would concentrate their minds and stop the rot. Which is why it will never happen.

  15. Lindsay McDougall
    March 10, 2012

    As we all know, Greece will be forced to leave the Euro and much of the second bail out fund will be money flushed down the toilet.

    However, we now need to look at a potentially much bigger problem. America’s federal debt is now in excess of 90% of GDP and should hit 100% round about the time that America elects its next President. As the Chinese say, we live in interesting times.

    Mitt Romney says that he could and would cut US federal government by 5% on day one of taking office. He made his living from turning round ailing businesses and has said that he enjoyed firing people. Not a ‘nice man’ but perhaps what America needs.

  16. Martin
    March 10, 2012

    Your analysis ignores the fact that countries not in the Euro who have borrowed too much are having to slash living standards. In the UK we had Mr Brown’s devaluation against the Euro – barely noted by the Euro hating press (either that or they have swallowed Harold Wilson’s Pound in your pocket stuff hook line and sinker). The weak Pound is pushing up import costs (inc. Petrol) and the Government has little slack in the budget leading to horrible tax hikes and cuts in benefits (some of which may or may not be fare). Hungary is also in a dreadful mess with its own currency.

    Yes the shareholders and investors in institutions who lend badly take a hit – its the same whether it is a Euro Country, a non Euro country or even a football club that gets into financial difficulties.

    If the foreign exchange markets are to be believed the Euro remains a more successful currency than Sterling. At the start of the Euro the Pound bought €1.43 now it buys a mere €1.19.

    1. Denis Cooper
      March 10, 2012

      You omit to mention that in between the pound has been as high as €1.75 and as low as €1.02:

      While since 1993 the trade weighted index for the rock stable euro, and its precursor ECU, has been as high as 114 and as low as 81:

      This is what happens with floating currencies – they float, both up and down, and while the current prospects for the euro are that it will probably continue to float down from its peak in December 2008 no more should be read into that than into the rapid decline in its external value to the low in October 2000.

      Far more significant is the fact that for the past two years the eurocrats have found it necessary to engage in massive and repeated breaches of the EU treaties to prevent the eurozone breaking up, the adoption of a shared single currency having exacerbated longstanding divergences between the component countries.

      Rather than leading to convergence of their economies as was so complacently anticipated by advocates of the single currency, or in some cases as was so deceitfully claimed in full knowledge that it would be very unlikely to have that effect.

      And even more significant is the consequent destitution and misery, and social and democratic breakdown, that the euro has helped to bring to some countries in the eurozone, while other countries and their populations have done very well out of it financially but are still seeing their democratic systems of national government seriously undermined.

      Those who believe as a matter of fundamental political principle that the British people should be stripped of the right to possess and govern their own country will always invent specious reasons why we should join the euro – the pound is too strong so we should join the euro, the pound is too weak so we should join the euro, the pound is too volatile so we should join the euro, even that the pound is so stable against the euro that we might as well join it.

      1. Disaffected
        March 10, 2012

        Good cogently statement. How do we rid the civil service and politicians of their selfish aim to be part of a European state?

        1. APL
          March 12, 2012

          Disaffected: “How do we rid the civil service and politicians of their selfish aim to be part of a European state?”

          In my opinion the correct question is: ” How do we establish control of our political class.”

          I think a first step is to abolish their salaried position. Parliament should be a part time occupation run along similar lines to the TA.

          I believe that would address your question. Once we control them, it seems obvious to me that we cannot cede our ability to govern ourselves to a supranational authority AKA the European Union.

          Secondly, once we control the politicians, we have a shot at controlling the civil service too.

          There in lies the heart of the cancer.

  17. NickW
    March 10, 2012

    The default and bailout has left Greece with MORE debt than it had before.

    European politicians have a lot to answer for; particularly the Greek politicians who have sold their Country down the river whilst they themselves are protected from the penury inflicted on their people.

  18. lojolondon
    March 11, 2012

    John, this is not just a total scandal, it is dishonest. The truth is that it is NOT a ‘50% haircut’ (whatever that means!) – It means that if you lent the Greek Government £100 you will get back just £15. The balance will be paid off over 30 years, if you believe that or depend on it you are stupid and haven’t learnt from your mistakes.
    The banks of Europe, who were ordered by politicians to ‘rebuild their balance sheets and invest in save government bonds not risky stocks’ are massive losers. The manipulation of the default legislation to prevent insured losses from being claimed is clearly fraudulent.
    This is a low point in Europe, and the result is that the markets will decide how to treat Spain, Italy, Ireland bond sales from now on, bearing in mind that any investment in insurance over the loan will be wasted money.
    The end is nigh, I can’t believe that a country like ours with 65-70% of Eurosceptics is still paying £15Billion pa into this corrupt, folorn social socialist experiment.

    1. APL
      March 11, 2012

      lojolondon: “The banks of Europe, who were ordered by politicians to ‘rebuild their balance sheets and invest in save government bonds not risky stocks’ are massive losers.”

      At the same time as the Greek investors take the haircuts, the ECB balance sheet explodes, I wonder who is borrowing all those Euros from the ECB and what is the ECB getting in return, Greek government debt perhaps?

      Once again, the banks that largely caused or colluded in the crisis get away from the scene of the crime aided by their partners in crime, the politicians.

Comments are closed.