Greek default?


              The ECB’s decision to lend very large sums of money to banks has for the time being quietened the Italian and Spanish bond markets, despite S and P downgrading various sovereign bonds. Meanwhile, trouble is blowing up again in Greece.

           Before Christmas one of the Euro crisis summits decided that Greece could negotiate a voluntary “haircut” with private sector Greek bondholders. The deal was advertised  that those companies and individuals that had lent Greece Euros would get back one half of what they had lent.  The aim was to get a voluntary agreement to this deal. That way the public sector owners, like the ECB, could be let off their share of the losses, and the banks and others that had insured this debt against default would be spared having to pay out, as it would not count as a formal default.

           Recently negotiations to agree the detail and tie in all the private sector holders of Greek debt have got into difficulties. Apparently when the full terms of the proposal were set out, the “haircut” turned out to be rather more than 50%. For every 100 Euros lent to Greece a private lender would get back just 15 Euros in cash when the debt fell due. Another 50 Euros would be cancelled. The remaining 35 Euros would be “repaid” in the form of a 30 year bond or promisory note. They are arguing over the interest rate on such a note. If you took the market rate you would be talking 30%. Some thought they would be offered 5%, but others think Greece can only afford 2-3%. No wonder the private sector creditors are none too happy. This is not so much a haircut, more a scalping.

          None of this is helpful to the stability of the Euro zone. I guess I am one of the few still shocked by the idea that a rich advanced western country can think it fine to refuse to repay its debts in full and on time.  It does not make it any easier for that country to return to the markets to borrow money in the normal way at realistic rates of interest any time soon. Looking at the market ratings, and the views of the Ratings Agencies, there are now doubts spreading about Portugal’s ability to repay all her debts on time and in full. Portugal needs to convincingly quell these market fears if she is to return to normal borrowing and get out of special measures and subsidised loans.

             The injection of large quantities of liquidity into the banking marketplace by the ECB can provide some temporary respite in some cases. It does not deal with the two underlying harsh realities. Many countries within the Eurozone are spending and borrowing too much, so they cannot borrow in normal markets at affordable rates. Many Euro countries are not competitive with Germany, or many other parts of the world, at their current level of costs and current rate of the Euro. There is no easy mechanism within the zone to route the German surpluses into the deficit countries to pay the bills.

               Until these two structural problems are solved, the application of liquidity can delay the crisis but not prevent it. Indeed, it just makes the debts and deficits larger when finally they do get out of control.  The policy prescriptions of higher taxes and lower spending do not help the economies recover. The  public sector retrenchment is not linked to policies to promote private sector growth. Instead the increasing tax burden and the growing regulatory burden makes it more and more difficult for the private sector to respond positively. When you add in damaged banks, it remains a toxic mix.


  1. Robert K
    January 17, 2012

    You are right – the more time, effort and money is put into distorting the true picture of the euro crisis the more severe the eventual crunch will become. If defaulters and failed enterprises – i.e. insolvent banks and euro states – had been allowed to go under when their problems hit the fan then the crisis would now be proprtionately less bad.
    Also, you are not the only one to think it is immoral that the EU should step in and facilitate a nation state within the eurozone to renege on its obligations.

  2. lifelogic
    January 17, 2012

    A toxic mix indeed and all caused by bad government at EU and local level and yet cheered on by the BBC, Libdems, Labour and half of the Tory party. The solution are clear but they are still not even starting to put them in place for absurd political reasons. The EU has no real or sensible leadership or structures to do it efficiently.

    1. Disaffected
      January 17, 2012

      I agree. But why is Osborne considering giving/throw away more taxpayers’ money via the IMF for this EU disaster? In October he claimed he would NOT be doing this. With chocolate teapot Cameron and his cast iron u turns, how much will this cost us John?

      Clegg is utterly so out of touch he still wants to use language of fear for the UK to have more integration with the EU. Simon Hughes wants to give welfare lifers more money than the £26,000 housing benefits that we do not have and have to borrow to give to them. LibDems have lost the plot.

      Taxes keep rising, but have not actually witnessed any proper cuts, despite all the talk. John, the figures you produced demonstrate that the Government must know this.

      Reply: No extra money for the IMF has yet been agreed as I understand it. Mr O does now say the IMF should not use its money to bail out currencies. Some of us will want to make sure this is true, as we would regard IMF bail outs of countries damaged by their Euro membership as bailing out a currency.

      1. lifelogic
        January 17, 2012

        Indeed. JR your reply is encouraging but I can have little confidence in anyone who can appoint Lord Patten to head the BBC trustees and keeps the job costing tax costing 50% for purely pathetic political reasons.

      2. Disaffected
        January 17, 2012

        As I said, ” considering”, when asked about more funds being given to the IMF. He did not rule it out.

  3. Mike Stallard
    January 17, 2012

    Money is no longer based on something which everyone agrees is valuable, like gold bullion for example. That means it is based on trust. Notes are, after all, just IOUs.
    If people trust the promise of repayment, then they will lend. If not, not.

    Please let us stop talking nonsense about haircuts. It isn’t big and it isn’t clever. Cutting hair is painless and it is something to be proud of. Barbers, after all, are quite often sensible businessmen.

    Nicking other people’s money is mean.

    Not repaying loans promptly and fairly is wrong. Under Jewish Law for instance, you had to repay by evening on the same day. And, if you had taken a cloak in pledge, or someone’s tools in pledge, you had to restore them that very evening in case the lender slept without dinner or warmth.

    I wouldn’t lend money to Greece or Portugal now. And if I wouldn’t, I don’t think many other people would either.

  4. Pete the Bike
    January 17, 2012

    It is a complete mystery to me why any investor thinks that any government debt is safe. It is issued by a totally unreliable, corrupt and dishonest group of politicians, bureaucrats and central bankers. Some governments would simply default, Greece and several other Eurozone countries are doing or will do that. Some governments like the US and UK will simply print money and steal it from investors and their own populations. Most governments will never repay full value of their debts. They borrow, spend, waste, steal, default. That’s what they do.

  5. Gary
    January 17, 2012

    There are no good options left, however restructuring is better than what we are doing : printing.

  6. oldtimer
    January 17, 2012

    On Geoff Randall`s Sky programme last night, a Greek economist suggested that Greece was determined to stay in the EZ and that there was no mechanism for the other members of the EZ to expel even if they wanted to. Presumably if this were so, and no additional funding was forthcoming, Greece will default. What then?

    Presumably the non state sector would get along as best it could running a black economy but what of the state sector? We appear to be in uncharted waters.

  7. alan jutson
    January 17, 2012

    Yes wonderful how most politicians think the private sector should not only pay for everything, but should be screwed on return of investments as well.

    Just look at the interest rates on savings deposits paid to the general public.

    John you say you are one of the few to be shocked, why, when it would seem that getting into personal debt, and going bankrupt is now less of a problem than it was a few years ago.(new government legislation allows such)

    Companies are regularly allowed go bust on Friday and start up again on Monday with the creditors of the old business loosing almost everything.(government legislation allows such)

    Many Banks are now on the verge of insolvency.(government legislation allows such)

    So it was only a little further step in the chain for Country’s to go the same way.

    What amazes me is that all of the above expect people/businesses to freely lend them money again !

    Is there a common theme here (government legislation has allowed such)

    Th truth is there is no encouragement for anyone to be prudent anymore (government benefits discourage such a thought and action), so why be surprised at the eventual outcome.

    1. Mike Stallard
      January 17, 2012

      Looking at a few of the posts, it seems that several of us are beginning to doubt the strength of the money system.
      That ought to be really scary.

    2. uanime5
      January 17, 2012

      I hear that more people are declaring bankruptcy in order to escape their debts.

  8. Nick
    January 17, 2012

    Presumably the non state sector would get along as best it could running a black economy but what of the state sector?


    What state sector? Its bust

    The black economy is already over 50%.

    Coming soon to the UK. The increase in debts this year in the UK is 500 bm.

    150 bn in extra borrowing, plus another 350 bn in pension liabilities because they are linked to inflation. The latter hidden off the books. [Still no sign John of your promise to publish all the numbers]

    Government income 550 bn.

    It’s going all Greek.

    Perhaps it is time for all MPs to be forced to reveal their gold holdings.

  9. Single Acts
    January 17, 2012

    I understand the EFSF has itself been downgraded by one of the rating agencies?

    Reply: Yes, of course. It is only a vehicle to borrow on the common credit status of the Euro states. Once they are downgraded it has to be downgraded.

  10. Javelin
    January 17, 2012

    A couple of points

    A recovery rate of 40% is usually used to price Soverign CDSs. So if the recovery rate is less then the price of CDSs will rise. This raises the cost of insurance and will raise the cost of Govetnment borrowing.

    Also the EU banks sold theirs bonds to hedge funds at low prices. Many hedge funds also hold CDSs. It is not in their interest to seek voluntary hair cuts because that would mean the CDS they bought would not pay out. Ironically the banks that sold them the bonds will also pay out for the CDSs at a net loss.

  11. Corvinus
    January 17, 2012

    The ECB has been providing massive amounts of liquidity to the system to save governments from facing up to what is a sovency problem. They will have to eventually. The problem is in reality every government in Europe (including Germany) is essentially insolvent. All will default eventually. The only question is how, and over what time frame the default will come.
    For some countries, such as Greece, Portugal, Hungary etc, the defualt is likely to come quickly and be direct through the forced write-down of government debt. Other countries, such as the UK, the default may largely come through inflation and exchange rate depreciation. All countries can be expected to default on their expressed obligations to their citizens through reducing welfare payments and pensions etc. With little growth and declining populations these are unaffordable over the longer term.
    Unfortunately the requirements of politicians to get elected have prevented these problems from being addressed until it is too late to avoid a major depression.

  12. David Williams
    January 17, 2012

    Would a “voluntary” Greek haircut invalidate Credit Default Swaps and force yields on peripheral eurozone countries’ debt even higher?

    1. Mark
      January 17, 2012

      Credit default swaps on Greek debt really are a side issue of themselves. The net amounts outstanding are very small, because the big profits have already been made and cashed out (and in any case mark-to-market collateral changes hands daily). The price for a CDS now reflects the near certainty of Greek default, so there is only high risk profit to be made by writing CDS risk on the hope that Greece doesn’t actually default. It’s a bit like being a bookie faced with any bet on a near certainty.

      The principle effect of declaring the CDS payable would be on perceptions of the future of the EZ – but even this is really emperor’s new clothes stuff.

  13. javelin
    January 17, 2012

    And if you need any further evidence – rumours are that there will be a EU 1 trillion LTRO from the ECB on the 29th of Feb.

    The clue is in the name LTRO “LONG” – the ECB is only supposed to act for Liquidity but over 3 YEARS – this is solvency. Draghi clearly can’t tell the difference.

    Beside which EVERY CENT of the eu450 million last month has gone back to the ECB and has not given a cent of QE or liquidity to the EU.

    This is merely allowing JUNK DEBT to be issued in Europe by Governments and swapped for cheaper loans. Kicking the can down the road.

    The FACT is that RISK does not dissapear – it is like energy. It is conserved. So where has the risk on the JUNK debt gone? The banks that bought the JUNK sovereign bonds have now passed it onto the ECB central bank. The ECB holds the risk – and if all those JUNK soverign bonds default the ECB will have to write them off. So who pays for that – well the ECB will have to print money. Deflating the EU and costing everybody in Europe.

    Central Banking can be an UGLY business.

    1. sm
      January 17, 2012

      How much is the UK liable for via the ECB? and is the ECB now outside of democratic control or does it appear the Germans have lost control to others?

      So who is now in control of the ECB?

    2. Mike Stallard
      January 17, 2012

      And it was just this that Herr Pohl was determined to prevent when the ECB was set up.
      He was haunted by Weimar and the Nazis who put the currency right – with due revenge on “the guilty men”.

  14. Martin C
    January 17, 2012

    You have missed a point I believe. You are right to say that the injection of liquidity by the ECB only serves to postpone the inevitable, and will make the crash bigger when it happens.
    But the point that I believe you have missed is, that the injection of liquidity by the ECB serves to transfer liability for the debt from investors in Greek soverign debt and to the european taxpayer. The main holders of Greek soverign debt are French and German merchant banks; and of those two mainly French. If Greece crashes now, France must re-capitalise her banking system at collossal and near-unaffordable cost. But give it a couple of years of “bailouts”, which are used to re-finance the debt, then when Greece crashes (note: when not if) then the taxpayer who has backed all the “bailout” money, and the IMF are on the hook.
    Therefore, it is massively in the interests of France and Germany to prolong the current state of affairs for as long as possible. Which is precisely what is happening.

    1. waramess
      January 17, 2012

      Martin C, you are quite right and this is of course very much the point. Normally negotiations would be between the debtor and the creditor with each seeking a deal that would be the least painful.

      What we have is the nonsense of sovereign states intervening in order to save the creditors with taxpayers money and the prospect of the IMF then having to intervene to save the currency. Dress it up however you like and use as many mirrors and smoke as you wish this is the nonsense that is being proposd.

      Like something out of a Marty Feldman sketch.

    2. Luke Jones
      January 18, 2012

      Indeed. An utter scandal

  15. Antisthenes
    January 17, 2012

    For decades now western nations have been taking political decisions without thought of economic consequences. This has been based on the idea that the political achievement was worth the economic cost. The EU and euro-zone were the granddaddy of them all when it came to chasing political dreams whatever the cost. So now we see how the political theory works in practice and find that the theory does not in fact work in practice. The major cause of the failure was to build national and EU structures using only socialist building materials without free market, capitalist and democratic foundations and mortar. So now we have structures teetering on the point of collapse where the builders are running around seeking any prop to hand blaming everyone but themselves. The obvious solution is to demolish the structures and rebuild as eventually despite the builders best efforts the structures are going to fall randomly and hurt everyone inside.

    1. Shade
      January 17, 2012

      Antisthenes – Do I detect a spot of wishfully thinking in your “obvious solution”?

      Given the EZ leadership’s determination so far, it is surely more likely that they will eventually accept that, to keep their currency, they will have to accept permanent fiscal transfers from north to south. The voters won’t like it but they won’t be asked. As all politicos in the EU seem intoxicated by the project, electing different parties won’t make any difference anyway – witness UK.

      How many times were we told there were x days/weeks to save the euro? Many deadlines have come and gone yet we are no closer to implosion. The best bet therefore may be to start buying EZ stocks as it is likely the project will continue to be rail-roaded through.


  16. Albert M. Bankment
    January 17, 2012

    In your third paragraph you make a telling elision, in referring to a ‘promisory’ note. Yes, it is indeed a derisory promise.

    The Euro is, was and remains an economic absurdity. I was writing papers and edvising clients to this effect throughout the nineties. The juggler can only keep his balls in the air for so long, in defiance of gravity. At some point one ball too many would be added to the cascade, or the juggler himself would tire, and the whole artificial edifice would necessarily fall victim to the laws of gravity, and the Euro to the laws of economics.

    Just about the only thing that Gordon Brown did, while Chancellor or PM, that was truly beneficial to this country (rather than his party or his bilious class antagonism) was to keep us out of the Euro, even if that was not on economic principle but merely in pursuit of his corrosive vendetta with Blair. For that, if for nothing else (as I strongly feel), he should be thanked.

    1. Andy
      January 18, 2012

      Gordon Brown kept us out of the Euro because we did not qualify for membership. The real ‘hero’ of this saga is Sir John Major who refused to sign up to the stupid Euro in the first place.

  17. Paul H
    January 17, 2012

    “I guess I am one of the few still shocked by the idea that a rich advanced western country can think it fine to refuse to repay its debts in full and on time.”

    It is not at all unusual, at least in respect of the “in full” part. Countries do it all the time when they decide to let inflation let rip (or, if not actually let rip, at least renege on a commitment to an inflation target as has been happening in the UK).

    1. zorro
      January 17, 2012

      Historically, look no further than Germany…..


  18. Atlas
    January 17, 2012

    Can the CDSs actually pay-up if so forced?

  19. Barbara Stevens
    January 17, 2012

    We all know what this crisis means, yet, the EU is already talking of having a new logo, which will cost millions to introduce. The waste they appear to think is normal astounds me. The whole saga of the EU the eurozone, and it’s wasteful operations, one would assume the UK government would say enough is enough, and withdraw. Yet, they don’t even contemplate it. Mr O is preparing to give more to the IMF, while we must be borrowing to furnish it, this is madness. We have Gove suggesting business provide the Royals with a new yacht, there appears many in our parliament out of touch with the country. If they have money to spare it should be invested in busineses that promote growth and jobs not silly ideas for the comfort of those who already have plenty, thanks to the taxpayers. I love the royals, and it’s not them who have suggested this, but they do have money themselves, so why don’t the family provide a yacht if they want one. As for the money situation in Greece and the rest, its obvious they won’t pay their debts, but if they get away with it, they’ll repeat it when times get hard the next time round. Debtors have a habit of repeating the damage time and time again. I hope we’re not suffering now and giving money via IMF loans to see us used, it looks very much like it to me. This money will go towards the eurozone we won’t be able to stop it once given, who’s fooling who here? The lot are now so rotten they’ve forgotten where decency begins and ends.

  20. figurewizard
    January 17, 2012

    What is so astonishing about this is the fact that the ECB is simply keeping its counsel, while the Germans are represented at these meetings in an attempt to wring an agreement out of the creditors. What with Italy, Spain and Portugal waiting in the wings, this approach is going to spook the markets even more. It will also ensure that any ‘solemn and binding assurances’ that come out of the proposed conference to rewrite the Euro rules (replacing the old ones that were consistently broken wholesale) so as to get it back on track are going to be doomed before they start.

    Are Merkel and Sarkozy really idiots or am I missing a trick here?

  21. javelin
    January 17, 2012

    A few more points Greece will reach the tipping point this weekend when the IMF roll in and the negotiations have completed.

    TO understand why the EZ banks shouldnt be in the business of banking look at hwo they sold their PIGS bonds a bottom dollar to hedge funds – who also bought CDSs from said banks. When the banks sold the PIIGS bonds they gave up the power to force a voluntary restructuring – now a forced restructuring is inevitable – and they will lose big on their CDSs – for having gained little on their PIGS bond sales.

    The ECB has stopped supporting Portugal in the markets – so they too will be forced to default.

    So Greece shuld default before March 20 bond sale. Portugal sometime later. BUT WHAT DOES THIS MEAN?

    Countries cannot be forced out the EU – so Greece will be able to default within the EU. The Greeks have control of that. On the down side as a member of the EU they cannot leave the EZ – they must leave the EU first then leave the EZ.

    So if Greece default and stay in the EU – the EU MUST ride to their rescue using the natural and economic disaster fund – to which the UK contributed. Luckily there are some stop gaps saying how money they can be given.

    The potentially bigger issue is the CDS triggering cash flows from the EU banks – pehaps the 1 trillion ECB LTRO next month is due to help with this. Not sure what collateral they will use when the liquidity crunch comes.

    Too make matters worse. Following the recent soverign downgrades the rating agencies will downgrade the banks within them as a matter of course.

    Im personally looking forward to the toxins being let of the system. There is a lot of cash saved up around the world and I hope George Osborne takes advantage of that with lower corporate taxes.

  22. Denis Cooper
    January 17, 2012

    It would help everybody if the UK government adopted a more proactive stance, rather than playing the role of a passive bystander watching disaster unfold and only finally stirring into action when forced to do so by a proposed idiocy like the FTT, which would clearly have an immediately and seriously damaging effect on the UK economy.

    Back in the autumn of 2010 when Merkel demanded an EU treaty change:

    Cameron’s supine reaction was to simply let her have whatever she wanted and demand nothing substantive in exchange, even though as it stood that proposed treaty change was obviously not in our long term national interests.

    And here it is, formalised as European Council Decision 2011/199/EU agreed by EU leaders including Cameron on March 25th 2011:

    and it now awaits parliamentary approval and final ratification by all 27 EU member states, the target date for it to come into force being written into its Article 2 as January 1st 2013.

    That is the EU treaty change which is legally necessary before the eurozone states can proceed with their intra-eurozone ESM treaty, a draft here:

    and yet Merkel and other eurozone leaders are now talking about getting the ESM up and running not in mid-2013 but by this July, six months before the eurozone states are due to receive their legal authorisation to do it.

    I’ve asked the House of Commons Information Office about the possible timing of the Bill necessary to approve European Council Decision 2011/199/EU, but they’ve said that they don’t know and they’ve suggested that I contact the FCO; however that’s unlikely to be any use, as on previous occasions when I’ve contacted the FCO on anything to do with that EU treaty change they’ve simply ignored my email.

    My view is that Cameron should NEVER introduce that Bill, so that the ESM cannot legally come into operation, but instead he should insist on negotiations leading to a more comprehensive package of treaty changes to put the eurozone on a sounder footing while protecting and advancing our national interests.

  23. Bernard Otway
    January 17, 2012

    By the way we now officially have a LOGAN’s RUN for elderly owners of property to downsize
    WHY ? do they not just CONFISCATE all property from anyone over 65,they care nothing for the older person.THEN nobody would buy property in their right mind,maybe the STATE could house ALL in DORMITORIES,a bit like the PODS the MACHINES keep the HUMANS in, in the MATRIX films.

    1. Mark
      January 17, 2012

      Grant Shapps now seems to have been captured by his department. A pity, because he made a promising start.

  24. Frances Matta
    January 17, 2012

    This morning on “Today” Pesto sounded like he was about to blub as he tried to explain it in BBC speak.
    When it all falls down can we expect the entire “Today” presentation team to burst into tears live on air.

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