Greek default already settled?

[Headless Thompson Gunner]

Very interesting, if true. 

This was the same basic strategy employed for the US banking sector back in '08.  You can't prevent the losses, but maybe you can buy time to prepare for them, so that when they do eventually hit they won't bring the whole thing down.  The banks used their TARP money to stay afloat long enough to begin finding ways to recapitalize and stay alive.

As relates to Europe, it means that Greece is hosed, everybody knows it, and nobody is bothering to stop it.  They're now playing for the remaining countries.

http://blogs.wsj.com/source/2010/05/05/greek-default-already-decided/

May 5, 2010, 2:55 PM GMT

Greek Default Already Decided

By Christopher Emsden

The real decision made by euro-zone authorities last Sunday was not to save Greece, but to escort it to a safe house where the country’s massive debt can be cut down to size through a painful restructuring.

That’s the view of Willem Buiter, a former member of the Bank of England’s Monetary Policy Committee and frequent consultant to the European Central Bank, who recently joined Citigroup as its chief economist.

He’s not making a prediction. He’s saying the decision has already been made.

In a note distributed Wednesday he said:

    “A Greek sovereign restructuring with a net present discounted value haircut became unavoidable when the euro area decided not to lend to Greece at something close to the risk-free rate, but at 300 or 400 basis points over the swap rate.”

The  final  €110 billion rescue package is full of feints. One is that the tough conditionality clauses require Greece to make swingeing fiscal cuts, so that it is running a primary budget surplus in 2013, by which time its gross sovereign debt will have risen to around 150% of GDP.

The hopeful rhetoric is that Greece might be able to tap markets at a 5% yield, roughly the marginal term of the rescue package.

But even if Greece could issue bonds at 5% in 2013, it would still have to pay 7% of GDP just to pay interest on its debt, a level that spells perpetual stagnation or would require a massive boom in global demand for ouzo and feta cheese.

Buiter says that describing Greek debt levels as having been “stabilized at that level is disingenuous”.

A mix of huge debt and no primary deficit - i.e. needs for external funds to pay for ongoing government spending - constitute “ the exact circumstances that makes a default individually rational for the debtor,” he notes.

But his main point is that markets will price in that default risk. This means that, when the bailout package expires at the end of 2012, it will have to be rolled over again, as Greece still won’t be able to obtain feasible borrowing costs.

So, even though the roughly 5% rate in the rescue package is strongly subsidized compared to the market, the euro-zone authorities that decided upon it basically decided then and there that Greece’s sovereign debt will be restructured.

The later it happens, the larger the haircut will be, says Buiter. He reckons a 30% cut today would have sufficed, but would have wrought havoc on the capital positions of Greek, French and German commercial banks, which would probably need to be recapitalized immediately, provoking major political embarrassment in Berlin and Paris.

Instead, Buiter says, the plan must be to give some time to those banks to recapitalize, or sneak Greek exposure off private balance sheets and on to public ones.

Expect an announcement in 2011, he suggests.

[longeyes]

What's another check backed by funny money to keep "the peace" (temporarily)?  But Greece isn't the only chick in the nest with an open beak.  Is it going to fall to the few (relatively) solvent governments in the Euro bloc to subsidize the entire Catholosphere of Spain, Portugal, Ireland, and Italy?  $146B is a lot; one trillion is another story altogether.  Well, Germany's getting, ironically, a vision of what economic life under The Third Reich would have looked like...

[Headless Thompson Gunner]

It shows that Germany and France have enough clout to be able to sacrifice the smaller nations for their own sake.  They throw away Greece, and maybe some of the others, in order to stay afloat themselves.

[longeyes]

Who is throwing away whom?  You're defending Greece's behavior and expecting the German taxpayer to pick up the tab?  Why are Greece's government pension follies the problem of the Germans?

Western civilization began with Greece; maybe it will end there too.

[Headless Thompson Gunner]

Say what?

When did I defend Greece or say that anyone should pick up the tab for them?

 

[longeyes]

Perhaps I misunderstood the implications of "They throw away Greece, and maybe some of the others, in order to stay afloat themselves."  It sounded deprecatory.  If not so, apologies forthcoming.  I'm glad we agree that Germany is entitled to protect its own interests in the interests of equity.

[Clem]

If the Greek situation mirrors the US banking situation in any way, then it could play out in a similar fashion. The first bank to get into big trouble was, if I recall correctly, Bear Stern. Six months after it was bailed out, the roof caved in on the rest. Does this mean six months after Greece is bailed out, the roof will cave in for Ireland, Portugal, Italy and Spain, which will probably be too big a mess to easily clean up then the roof caves in for Germany and France?

We are witnessing the implosion of socialism.

[longeyes]

And today we read, surprise, that Obama was pushing the whole Euro bail-out.  

They are destroying the global economy in order to save it...now where did I hear that before...?