“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.”
Don’t mean to sound all class warrior - but holy eff, is this not the coldest most arch line you’ve ever read in a press release? Seriously, when they make a movie about Greece’s default saga, I hope Meryl Streep gets to play whatever public-relations executive wrote that line.
Basically, what’s happening is this: the Greek government and the banks which hold the Greek government’s debt (collectively represented by an organization called the IIF) are negotiating on how much of a loss the lenders should take on the government’s debt - both in terms of where the interest rate should be set, and what the total debt load should be. As you might expect, the Greek government (and the IMF and the EU) think the debt burden should be substantially reduced, while the banks disagree.
Why does this have to be voluntary? Why can’t Greece (which is a sovereign state which can make its own rules) not just impose losses on the banks and tell them to smarten up or they’re not getting paid at all?
This is an entirely reasonable question, but the problem is all the outstanding credit-default swaps, which are basically insurance on Greek government debt. (More specifically, they’re contracts that pay out a sum of money if the Greek government defaults. This isn’t quite like insurance because the Greek government doesn’t actually have to owe you any money to buy a CDS.) The CDSs will only pay out if the government unilaterally defaults (instead of negotiating to a voluntary compromise) and no one wants them to pay out.
Why? Because banks have issued way too many CDSs and no one knows how much is outstanding nor how much it costs. If Greece defaulted, then all the banks who’d issued CDSs would have to sell assets to free up cash to pay back the credit default swaps. So suddenly, on top of a eurozone member defaulting, all these big banks would be selling billions of dollars worth of assets all at once. Moreoever, none of the banks would be able to lend to each other, because they wouldn’t have the cash.
The result is a credit crunch and stock market crash like in fall 2008. Except this time, Greece is defaulting at the same time, so many of the banks that hold lots of Greek government debt will get wiped out at the same time. This would almost certainly mean bank runs across Europe. Basically this would be a full-on depression-style crash.
Anyway, right now some of the lenders are indicating they’ll basically never accept a deal, because it’s more lucrative for them to let the Greek government go under so that their CDSs pay out. (Yeah, see, that’s why these posts are tagged #the wonders of capitalism. Think about the fact that these corporations are willing to see a country lose its ability to finance its operations so that they can trigger insurance contracts. And they’re powerful enough that this is a legitimate threat!)
The Greek government has said “if you’re going to be like that, we’re just going to impose on everyone whatever deal the majority of lenders go for”, because obviously they don’t want to see any potential deal totally kiboshed by a few holdouts. Obviously this has made the minority of lenders who will never accept a deal absolutely furious, and also it’s not clear whether such a “collective action” clause would mean this default was still legally considered voluntary and negotiated (for the purposes of CDS payouts).
Anyway, now the lenders are pausing negotiations overall, as noted above. In about seven or eight weeks, if these negotiations aren’t settled then Greece will see a disorderly and really damaging default. They’ve been negotiating since the end of October with absolutely no progress. So this is not reassuring.
(Source: reuters.com)
