Wednesday, February 22, 2012

Fearless Prediction: On March 20, Greece Will Default

On March 20, Greece has to come up with €14.3 billion—or else it will be bankrupt.

Of course, Greece doesn’t have €14.3 billion—that’s why the Troika of the IMF, the EC and the ECB are trying to hammer out a deal to bail them out again: A bailout to the tune of €136 billion. They’ve had marathon-length negotiating sessions, one “crucial emergency meeting” after another—hell, they even called the Pope to send them a case of holy water and a truckload of wooden stakes. I’m serious!

Last Monday, a deal seemed to have emerged: That’s what the announcement sounded like. In fact, it looked so much like a done deal—it was spun so decisively as a done deal—that I was all set to write something snarky like, Greece Takes It Greek Style: “Thank You Troika, May I Have Another” Bailout On Its Way. (What can I say: I’m a vulgar bastard.)

But then . . . then we all started looking at the fine print of the deal. And that’s when everyone who follows this stuff started to realize that the deal wasn’t a deal—merely the illusion of a deal.

A motto of mine: Never try to do the work someone else has already done for you. In the case of analyzing the Greak “deal”, I turn to John Ward, who pretty much nailed the critique of the deal:

1. [A]lthough the ECB has made a reasonable fist of complicating its subordination of the private bondholders – money out, profits redistributed, local central banks reinvesting and so forth – it remains a preferential deal done outside this so-called ‘bailout with PSI’. The IIF creditors have sort of voluntarily taken the extra 3.5% hit, but the coupon they’ve been offered is worth less than the original. In a statement issued by representatives of private bondholders, the new interest rates – 2% for the first three years, 3% for the next five, and 4.2% thereafter were described as “well below market rates”, and the creditors will lose money on them. The tone of the statement screams ‘involuntary’. In English, all these factors spell default.
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