Wednesday, Apr 28, 2010
Happy megotiating!
Reuters: Scenarios: Options for Greece if it cannot pay its debts
NEGOTIATED DEBT RESTRUCTURING
PROBABILITY: most likely in the medium to long term
Greece would negotiate a restructuring of its debt before missing a payment. This would require investors to take a significant discount on their debt holdings and could include extending maturities or possibly investors switching to longer maturities.
Bondholders could, however, see haircuts of anything from 20 to 40 percent .
MARKET IMPACT: Spreads on other highly-indebted countries in the euro zone would widen sharply while German benchmarks would benefit from flight to quality and the euro could fall to around $1.15, levels last seen in 2005.
Posted by devo @ 07:16 AM (652 views) Add Comment
6 Comments
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1. alan said...
This article is one of the "most clicked" on the reuters website this morning.
When they say "flight to quality" its the German bonds that get the mention - not UK! We are alongside Spain and Italy in the tables.
2. fallingbuzzard said...
Germany is the natural flight to quality for the Euro. Thats why
3. mrmickey said...
What about the Easter Block countries I thought they were going to impolde causing death and destruction, has that been now put on the back burner?
4. uncle tom said...
I've just spent a few days away from the 'puter, and have pondered the possible approaches to this issue while wandering through the spring countryside..
..and I don't really buy into any of these options, as detailed..
My reckoning is that there are three realistic ways forward;
1) ECB issues bonds in its own name, and uses the funds raised to provide a 5% line of credit to any eurozone nation that needs it.
2) Greece defaults, stops making payments to bondholders, and in order to balance its books, makes part of its payments to those on the state payroll in the form of IOU's.
3) Greece breaks with the ECB, making the Greek euro a separate currency to the euro proper. All debt and obligations are re-denominated into the new currency. Budget shortfall is met by creating new money, so devaluing the new Greek euro. (In time, the Greek euro might be re-named New Drachma, but there would probably not be time to do this in the first instance.)
Option 1 would be favoured by the federalists, but it would mean making a very broad interpretation of an emergency clause in the treaty texts.
It would be very controversial, would spawn some awkward 'what if' questions, and would present countries like Greece and Portugal with the prospect of decades of onerous debt servitude.
If I were Trichet, I would be very worried about such a course of action, without a clearer mandate to do so.
Option 2 would do no-one any favours, but could very easily arise if the politicians both in Greece and the EU in general; lack the courage to grasp the nettle. It would probably provoke severe civil disturbance within Greece itself.
Option 3 seems the best way forward, but it can't be openly discussed or planned, as this would provoke an immediate run on Greek banks. It would almost certainly be thrashed out, signed and sealed over a weekend; while the banks are closed. A holiday weekend would give a welcome extra day to get it sorted..
..it is not impossible that Greece will leave the eurozone as soon as this May day weekend; although I suspect they are not quite reconciled to the need to make that step yet..
..watch, wait, and see!
5. drewster said...
Uncle Tom,
There is a second bank holiday in May. In continental Europe, including Greece, it falls on May 24th this year (our bank holiday is a week later).
6. uncle tom said...
Drewster,
I wondered about that, but I'm doubtful they can hold out that long..