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Greece Passes Key Debt Test
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The terms of the debt restructuring deal with the bond swap in Greece become clear on March 9, 2012. In the deal with private bondholders -using collective action clauses to force remaining bondholders into the deal- about 96% of the 206 billion euros of Greece's bonds will be exchanged. Private bondholders held out throughout most of 2011, delaying the inevitable as Greece's economic situation became increasingly hopeless. This created a logjam with the German government, which insisted on serious private sector participation and bondholder haircut as the cost of poor lending decisions of the French, German and other European banks that made loans to Greece out of proportion of the ability of Greece to payback loans. Charles Dallara of the Institute of International Finance, negotiating for European banks, offered a 10% average loss on the bonds in July 2009. It was not until German Chancellor Merkel told Dallara at a late night meeting on October 27, 2011: "this is my last offer," for a 50% loss on the face value of the bonds, was agreement reached. The Greek debt swap that now takes place will give private bondholders a loss of 53.5% from the face value of 200 billion euros of bonds that they hold. The new Greek bonds issued in place of the old bonds include short-term bonds issued by the eurozone rescue fund at 15% of the face value of the old bonds, and a series of Greek bonds with maturity ranging from 11-30 years valued at 31.5% of the face value of old bonds. That even this 53.5% bondholder loss will not be adequate, as Greece's economy looks irretrievably damaged as it spirals downwards, is shown by the value of these bonds already trading in a hypothetical "gray market." The new 30 year bond is quoted at 17 cents and the 11 year bond at 22 cents. The questions remain about the stalling by the banks in taking the losses earlier- was this the wisest move considering the losses beyond Greece as the eurozone economy as a whole has suffered from the prolonged negotiations stretching through 2011, lurching from one crisis to the next? Even if the stalling was designed to give time for banks to repair their balance sheets, was this the best strategy, considering the damage inflicted on European economic growth. John Taylor of Stanford points out that the European banks delayed the unavoidable serious debt restructuring for too long, when insolvency was the real issue not illiquidity, and exaggerated the effect of contagion from the beginning- in John Taylor, WSJ, 2/22/2012, A Better Grecian Bailout. And John Cochrane of the University of Chicago, points out that French and German governments if they bailout French and German banks should do so openly and frankly rather than cover this up as bailouts of countries, because this would lead to serious questions about the poor lending decisions of the European banks and government supervision of the banks- in Cochrane, WSJ, 12/2/2010, 'Contagion' and other Euro Myths. As early as Feb. 2010, Cochrane was suggesting the forced exchange of new bonds with long debt maturities for exisiting bonds with short debt maturities, as short term debt was the major issue here.
The logjam between the bondholders (mostly French and German banks) and the German government- 2010-2012
07/01/2011
The roots of the Eurozone financial crisis go back to the issue of who should pay for the excess lending of French and German banks. Will it be the German taxpayer or the banks that took excessive risks? German financial experts, the German government and parliament, German public opinion, are all adamantly opposed to letting the banks off without sharing at least 50% of the costs of a bailout. A review done by the European Commission in coordination witht he IMF and the ECB, shows that from May 2010 (the date for the inception of the aid program to Greece) to September 2011, $52 billion of the $91 billion loaned to Greece went to pay bondholders for bonds that came due. The July 2011 EU agreement for Greece called for 21% of losses to be allocated to the bondholders. The German government is pushing for 50% and German parlamentary leaders in Merkel's party are balking at anything less.
Grouped Articles
Wall Street Journal 07/13/2011
New York Times 04/13/2013
Policy âTroikaâ for Europe Financial Woes at Odds
New York Times 06/07/2013
Most Greek bailout money has gone to pay off bondholders - The Washington Post
Washington Post 10/23/2011
Dexiaâs Collapse in Europe Points to Global Risks
New York Times 10/22/2011
European Officials Shaping Greek Rescue and Effort to Aid Banks
New York Times 10/22/2011
The final terms of the Greek debt swap in March 2012
06/30/2011
The final terms of the swap of new bonds with longer maturities and lower interest rates for old bonds, at a fraction of the face value (estimated at 53.5%), become clear on March 9, 2012. Greece's government writes new collective action clauses to complete the deal with private bondholders.
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Greek Bonds Soar After Fitch Upgrade
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Fitch Raises Greece's Credit Rating
Wall Street Journal 05/15/2013
Greece Gets Rating Recognition
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Greece Bulls Charge Into Corporate Bonds
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EU Dismisses IMF's Criticism On Greek Bailout
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Greek Government Bonds Pay Off Big for Fund Managers
Wall Street Journal 10/28/2013
Germany's insistence that bondholders bear losses in any future EU bailouts.
11/28/2010
Grouped Articles
Europe Backs Irish Rescue and New Rules on Bailouts
New York Times 11/28/2010
Wall Street Journal 12/02/2010
'Contagion' and Other Euro Myths
Wall Street Journal 12/02/2010
Government debt: Behold 2011, the year of sovereign shocks
Economist 12/18/2010
Europe Needs to Apportion Pain
Wall Street Journal 03/17/2011
Plan for Greece Favors Creditors
New York Times 07/25/2011
John Cochrane and other experts give a no-nonsense view of the bailouts and the financial crises facing Europe
12/02/2010
Insights that the real problem is short term debt financing. The need for the EU to insist on long tem debt financing for governments in Europe. The solution for this crisis is not in bailouts of Greece, Spain, Italy and so on, but to swap the short term debt for debt with longer term maturities, and for bondholders to take a haircut. Similiar to the Brady Plan for Latin America in the late 1980's. The bailout of Ireland in reality not a bailout of Ireland, as a bailout of German and British banks that made risky loans to Irish banks and the Irish government. The U.S. government's debt also tilted to short term debt and problems similar to European problems.
Grouped Articles
EU Dismisses IMF's Criticism On Greek Bailout
Wall Street Journal 06/07/2013
'Contagion' and Other Euro Myths
Wall Street Journal 12/02/2010
As Ireland Flails, Europe Lurches Across the Rubicon
Wall Street Journal 12/27/2010
Running the euro zone: Pact of uncompetitiveness
Economist 02/12/2011
Wall Street Journal 03/11/2011
Europe Needs to Apportion Pain
Wall Street Journal 03/17/2011
Lawyers Buchheit and Gulati who advised Greece's government on the bond restructuring deal in March 2012
06/30/2011
Buchheit and Gulati helped Greece achieve the bondholder write-off deal through the legal mechanism of writing a collective action clause. This was possible because Greece's bonds to private investors were issued under Greek law. Collective action clauses make it possible to ensure a deal is made even if some private investors reject it. A haircut for private investors with a bond swap was designed to reduce Greece's debt to a sustainable level.
Grouped Articles
Greek Bonds Soar After Fitch Upgrade
Wall Street Journal 05/15/2013
EU Dismisses IMF's Criticism On Greek Bailout
Wall Street Journal 06/07/2013
Policy âTroikaâ for Europe Financial Woes at Odds
New York Times 06/07/2013
Greek Government Bonds Pay Off Big for Fund Managers
Wall Street Journal 10/28/2013
Wall Street Journal 03/12/2012
A Bold Proposal to Offer Greece Some Financial Relief
New York Times 07/10/2015
Greece's debt crisis in 2012 after the agreement with private creditors to take 50% of the losses on Greek bonds is not enough to reduce debt to sustainable levels
06/30/2011
Bondholders accepting 50% of losses- as agreed with EU leaders in Nov-Dec 2011 -will not be enough for Greece to meet its debt obligations, because of a fast deteriorating economy. By March 20, 2012, 14.5 billion euros of bonds come up for repayment or refinancing. More money will be needed from the EU. The voluntary exchange by private creditors of existing bonds for new bonds with 50% face value and maturing over a longer period will be made under an agreement using English law. This will be harder to change in the future, putting the burden on any future financing shortfall on EU countries unwilling to make further commitments to Greece.
Grouped Articles
Greek Bonds Soar After Fitch Upgrade
Wall Street Journal 05/15/2013
EU Dismisses IMF's Criticism On Greek Bailout
Wall Street Journal 06/07/2013
Policy âTroikaâ for Europe Financial Woes at Odds
New York Times 06/07/2013
Greek Government Bonds Pay Off Big for Fund Managers
Wall Street Journal 10/28/2013
Europe Fears Rising Greek Cost
Wall Street Journal 01/11/2012
Wall Street Journal 01/14/2012
The growing debate over bondholder haircut, easy money policies, sacrifices, and austerity policies.
11/25/2010
This debate puts British prime minister Cameron, and German chancellor Angela Merkel, on one side, with US President Obama, US central bank chairman Bernanke and other leaders on the other side. The blanket Irish guarantee of all Irish bank debt is an example of improper action that could have prevented the need for an Irish bailout, when guaranteeing only retail Irish bank debt would have worked. Merkel has insisted on bondholders sharing in bank losses, and tougher action required for countries receiving bailouts.
Grouped Articles
A Crisis Needing More Sacrifice
New York Times 11/25/2010
Crises Shake German Trust in Euro Zone
New York Times 11/26/2010
EU Outlines Bond Restructuring Plan
Wall Street Journal 11/28/2010
Europe Backs Irish Rescue and New Rules on Bailouts
New York Times 11/28/2010
Wall Street Journal 12/02/2010
'Contagion' and Other Euro Myths
Wall Street Journal 12/02/2010
A Brady Plan type solution for the debt crises in Greece, Ireland, Portugal and other EU countries.
05/18/2010
Grouped Articles
EU Dismisses IMF's Criticism On Greek Bailout
Wall Street Journal 06/07/2013
Personalities Clashing Over How to Handle New Greek Bailout
New York Times 07/23/2015
Nervous Europe Trying to Halt Economic Crisis
New York Times 11/30/2010
Europe's Central Banker Seeks Deeper Fiscal Union
Wall Street Journal 06/03/2011
'Contagion' and Other Euro Myths
Wall Street Journal 12/02/2010
Greek Myths and the Euro Tragedy
Wall Street Journal 05/18/2010
Bloomberg Business Week's Peter Coy calls for debt forgiveness- creditor haircuts for sovereign debt in Europe, and bank writedowns of debt in the U.S. housing market
08/10/2011
Peter Coy of Bloomberg Business Week calls for debt forgiveness in the August 2011 issue of Business Week. Stretching out the debt issues without writedowns says Coy, only leads to austerity programs, stagnant growth and drags the issues out over many years. Better solutions can be found by starting anew with writedowns now and arrangements to make this possible, and returning to growth sooner. What about moral hazard? There is moral hazard in letting the banks bear no cost for reckless lending decisions, they are as likely to repeat this behaviour says Coy, as Greece or the underwater mortgage borrower in the U.S., if they did not have to bear the consequences of their decisions.
Grouped Articles
How Righteousness Killed the World Economy
New York Times 10/12/2014
Greece’s new prime minister wants Germany to pay for Nazi war crimes - The Washington Post
Washington Post 01/26/2015
For Europe’s Sake, Keep Greece in the Eurozone
New York Times 07/06/2015
How to Undo the Damage in Greece
New York Times 07/06/2015
Personalities Clashing Over How to Handle New Greek Bailout
New York Times 07/23/2015
BusinessWeek 08/10/2011
Greece's long delayed bond swap with European banks of March 9, 2012
03/09/2012
The bond swap of new bonds with long maturities reflecting a writedown of 53.5% for the old bonds with short maturities was finally achieved on March 9, 2012. By this time Greece's economy was shrinking badly and the new bonds were trading at levels that reflected the need for further writedowns only days after the deal. Prof. Cochrane at the University of Chicago and Prof. John Taylor at Stanford say French and German banks exaggerated the effects of contagion from the beginning to delay writedowns for as long as possible. The effects on the eurozone of the delays in tackling the problem early and decisively are negative or slowing growth and is likely to hurt the banks operating in that environment, raising questions about the wisdom of that strategy.
Linked Articles
Wall Street Journal 03/09/2012
Wall Street Journal 03/09/2012
Greece's long delayed bond swap with European banks of March 9, 2012
03/09/2012
The bond swap of new bonds with long maturities reflecting a writedown of 53.5% for the old bonds with short maturities was finally achieved on March 9, 2012. By this time Greece's economy was shrinking badly and the new bonds were trading at levels that reflected the need for further writedowns only days after the deal. Prof. Cochrane at the University of Chicago and Prof. John Taylor at Stanford say French and German banks exaggerated the effects of contagion from the beginning to delay writedowns for as long as possible. The effects on the eurozone of the delays in tackling the problem early and decisively are negative or slowing growth and is likely to hurt the banks operating in that environment, raising questions about the wisdom of that strategy.
Linked Articles
Wall Street Journal 03/09/2012
Wall Street Journal 03/09/2012
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