Monday, January 2, 2012

Germany looking at 75% writedown on Greek debts

A Bloomberg article reports that Germany is looking at making private sector investors in Greek sovereign debt take a 75% haircut.

Clearly, this will be the first of many forced haircuts as it will be impossible for politicians in Ireland, Portugal, Spain and Italy to suggest to their voters that they should endure significant amounts of austerity rather than have the private sector (aka, banks) absorb the losses.

This is particularly true given that banks have a special role as the safety valve circuit breaker between the excesses of the financial markets and the real economy.  In a world where bank deposits are guaranteed, banks can absorb the losses from debt write-downs and still continue to operate despite massive amount of negative book equity.

Germany’s government declined to comment on a report that it may push for creditors to accept bigger losses on Greek debt than previously agreed upon, saying only that talks on lowering Greece’s debt level may end soon. 
Germany is studying a proposal to write down 75 percent of Greek government bonds held by private creditors as part of a planned debt swap to ensure greater debt sustainability, Greek news website reported today, without citing anyone. 
Under the terms of Greece’s 130 billion-euro ($168 billion) second bailout backed by European leaders in October, investors would take a 50 percent hit on the nominal value of 206 billion euros of privately owned debt. 
Talks are ongoing about the specifics of the role of the private sector and Germany assumes that the negotiations will end soon, the Finance Ministry in Berlin said in an e-mailed response to the Greek report, without elaborating.... 
Greece’s creditors are resisting pressure from the International Monetary Fund to accept bigger losses on holdings of the nation’s government bonds, three people with direct knowledge of the discussions said last month.
Of course the banks are resisting, because once everyone realizes that banks can in fact take write-downs and still keep operating, write-downs will become the solution du jour.
Greece’s debt will balloon to almost twice the size of its economy this year without a write-off accord with investors, the IMF said Dec. 13. 
At a Dec. 9 European summit, German Chancellor Angela Merkel backed away from a prior demand that bondholders shoulder losses in any future euro-area rescue, saying that Greece was a “special case.”

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