€urosclerosis: The Greek bailout


Europe Reaches a Greek Deal

By Geoffrey T. Smith, Ainsley Thomson and Costas Paris

BRUSSELS—Euro-zone finance ministers early Tuesday agreed to an ambitious €130 billion ($172.1 billion) rescue deal that will see Greece’s private creditors take an even larger loss in order to put the debt-laden country on a sustainable footing and avert a catastrophic default.

The agreement revolves around a debt exchange that calls for private investors to waive 53.5% of their principal under a massive debt swap that will cut Greece’s outstanding debt stock by €107 billion. That goes beyond a 50% haircut agreed upon at a summit in October.

Speaking after the conclusion of more than 12 hours of negotiations, Eurogroup chairman Jean-Claude Juncker said the agreement “provides a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing, and hence for safeguarding financial stability in the euro zone.”

The deeper private sector haircut will help bring Greece’s debt as a proportion of gross domestic product to 120.5% by 2020 from over 164% currently.

Much more at the link. But, put basically, the private creditors who have been enabling Greece to live well beyond its means for decades will have lost out on more than half of their investments, and will probably have to count themselves as fortunate to have lost only that much.

The deal has been in the works for some time now, and Moody’s Investors Services just downgraded the credit ratings of other European countries.1 Sovereign debt, which wasn’t considered a questionable or risky investment in European democracies before, now is.

Greece’s bailout plan remains shaky. Although the Greek government approved the very serious austerity measures required by the European Union and International Monetary Fund to qualify for the bailout, Greece is still a parliamentary democracy, and new elections are not that far off. The bailout deal still requires a 100% acceptance rate by the private holders of Greek sovereign debt for a “voluntary” bond swap; private investors hold roughly €200 billion of Greek debt. Since not accepting the bond swap means not a 53.5% loss, but torches the entire deal and very probably means a Greek default and 100% loss, it is expected that the “voluntary” participation rate will be 100%.

An interesting article from the left-wing British journal, The Guardian, holds that the riots by the Greek people over the austerity measures are not just demonstrations, but a real and fundamental change, a true expression of hatred:

If ever a society seemed to be on the brink of something new it is Greece today, faced with a raw choice between death and rebirth. As this picture shows with fiery clarity, implacable forces are meeting immovable objects on the streets of Athens.

There’s much more in that story, but, in the end, it is a story about a population used to, for a generation now, living better than its production justified, and now being told that not only must their standard of living drop, but that they have to start paying on the debts they accumulated in the past, for goods and services already consumed and now gone. They must work harder, and enjoy life less, for the things they received in the past.

New elections may very well change the government, and the promises of austerity which have been reluctantly made by the current government could well be abandoned. If that happens, and depending upon when that happens, there would be huge losses among the eurozone nations which contributed to the bailout deal, the International Monetary Fund, the European Central Bank and the private investors, huge losses beyond what are already anticipated. The eurozone countries are accepting the losses they have, because the Greek debt is spread so widely through their economic systems that a default and bankruptcy would mean much worse losses, much more disorderly losses, and losses which could lead to a cascading stream of bankruptcies. The Europeans are hoping to spread the losses in such a manner that everybody loses a little, but nobody, or at least nobody important, goes broke. Whether it works remains to be seen, but your editor is not optimistic.

  1. The chart at the right explains Moody’s credit ratings categories for sovereign debt.

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