What Are We Going To Do About This….
link Fitch Says 50% Greek Bond Haircut Would Be Default Event – Businessweek.
After months of hand-wringing and warnings of dire consequences, an 11th hour deal was inked to help Greece avoid an unknown but certainly ugly financial scenario. The E.U., headed principally by Germany, agreed on a rescue plan to halt the crisis. Angela Merkel of Germany is being hailed as a triumphant hero for solving the debt impasse. The collective action of stock markets worldwide was to explode higher in a frenzied stampede of buying as the boiling crisis appears to have been averted.
But was it? It’s not as if someone stepped in to magically make the fiscal problems of Greece go away. The agreement to support Greece’s ailing government and financial system was for all intents and purposes a default event. A default event for those not versed in financial lingo is the arid description of someone not paying their debts. According to articles such as the one linked, creditors of Greece’s debt holdings will take a 50% write off of their face value.
Imagine if someone owed you $1000 and after a series of unpaid interest events, he came to you and said he’d pay you $500…maybe. I’m not sure many would be doing cartwheels and flips on that news. In the case of Greece, the many banks, institutions and investors who are owed money on those bonds have been cajoled to write off their investment by half. So, these investors are out of luck on their bad investment. By extension, shareholders of these banks and institutions get haircuts on their investments. Since some of the holders are governments, the taxpayers wind up subsidizing the loss.
But it’s not only greedy banks and investors who suffer as may be portrayed by the vapid media.
Some of the parties getting financial haircuts are Greek pension plans themselves since they are big owners of government debt obligations. In essence, the pool of money represented by those bonds available for paying future retirees etc will have shrunk by a half. It’s as if you removed wood from the roof of a house to block up the leak in the basement during a heavy rain.
Whether in the case of Greece, or that person who borrowed $1000 from you and now only wants to pay back half, what is the likelihood that someone else will lend money to them based on this default record? As likely as flying pigs, unless of course a usurious rate of interest was applied… which ironically makes the likelihood for repayment more unlikely.
Greece is not alone with their fiscal problems. Governments paying out much more than they take in is a common affliction to many nation-states. What they faced is an issue that many other nations such as Italy and Portugal are grappling with as well. Of course the country that faces this problem on the grandest scale is the United States. If the process of lending money to nations gets iffier and iffier with many taking the route of Greece by defaulting, the cost of borrowing any money skyrockets. When that happens, nobody gets loans because no one gets paid back. I’m not so sure people will be cartwheeling then.
Personally, I feel that letting debtors off the hook is too easy. If there are no real consequences, what’s to change the behaviour? The classic method to enforce repayment of debt as practiced by such as the Mafia, was to break various body parts such as legs in order to enforce their creditor contracts. Of course this only works on a small scale and the staffing problems associated with it would be difficult in today’s labor climate. The other part was to assume ownership of whatever asset the debtor may have as collateral such as houses, cars or businesses.
Imagine if we applied this on the international scale. Entire stretches of scenic beaches and resorts could be taken over as compensation for non payment of debt. The entire face of a nation’s culture could conceivably change. At the moment, the Germans and Chinese are rumored to be large holders of foreign debt. What if they took over all the resort areas of Greece and changed the complexion of their culture? Souvlaki Chan’s Taverna. Or Octoberfest with Uzo instead of beer. Hmm…