Traditions and dogmas rub one another down to a minimum in such centers of varied intercourse; where there are a thousand faiths we are apt to become sceptical of them all. Probably the traders were the first sceptics; they had seen too much to believe too much; and the general disposition of merchants to classify all men as either fools or knaves inclined them to question every creed. Gradually, too, they were developing science; mathematics grew with the increasing complexity of exchange, astronomy with the increasing audacity of navigation. The growth of wealth brought the leisure and security which are the prerequisite of research and speculation; men now asked the stars not only for guidance on the seas but as well for an answer to the riddles of the universe; the first Greek philosophers were astronomers. “Proud of their achievements,” says Aristotle, “men pushed farther afield after the Persian wars; they took all knowledge for their province, and sought ever wider studies.” Men grew bold enough to attempt natural explanations of processes and events before attributed to supernatural agencies and powers; magic and ritual slowly gave way to science and control; and philosophy began. [Will Durant. The Story of Philosophy. 1926]
Tag: Greece
As part of the bailout agreement between Greece and the Troika, the Greek government has agreed to reduce its debt. This is the context behind the latest Greek buyback program, where the Greek government is looking to reduce EUR20 billion worth of debt. While I typically like debt reduction exercise by the public sector, I am unsure how this particular effort at this particular moment is ideal.
The main issue I have with the program is that Greece has no cash of its own. At least they do not have enough. On top of that, the government suffers from primary deficit and that means the government is unable to finance its operations. So, it is dependent on bailout money, provided by the reluctant Troika which includes European governments, which includes even the more reluctant Germany, the country that is really footing in the afterparty clean-up bill.
So, that is a bailout financed by public money of a different country.
The problem here is that the money will be used to buy back debt from private creditors. As you can see, it is a transfer of wealth from public coffers to private individuals and firms. There is something repulsive in doing so.
The factor that may mitigate that sentiment is that a majority of those private shareholders are Greek banks. In some sense, a large chunk of the bailout money used in the buyback program will help strengthen Greek banks and indirectly, the Greek economy. A majority of holders of Greek sovereign debts, apart from the Greek banks, are European of origin. So I suppose the buyback does help stabilize the European market too.
Anyway, while these private bondholders suffered a large haircut recently, the buyback program will mean that these holders will book in some profits according to the Wall Street Journal.[1]
Another factor is that because the offer is slightly above market price of those debts, the price of Greek sovereign debt has increased and that reduces its yield. In other words, that allows for cheaper financing for Greek government. But I do not think anybody will be crazy enough to buy Greek sovereign debt any time soon.
Regardless the mitigating factors, I prefer one thing more than the buyback: more debt haircut but this time on the public side.
The Economist supports further debt forgiveness for Greece to get Greece out of the economic disaster it is in now.[1] I support such move. It is essentially a default, but making it consensual between the creditors and the debtors will be important in maintaining some kind of stability in the market.
The forgiveness will definitely free up resources for the Greek government. Even right now, just as The Economist wrote, Greece is increasingly unlikely to repay whatever it owe without resorting to the debt market. Besides, as The Economist pointed out in the same article, more than 70% of Greek debts are owned by European governments and the ECB. Given that these governments as well as the ECB are in it together with Greece if they want to maintain the integrity of the Eurozone, they should take further haircut. The ECB has been adamant about not suffering a haircut, but I think that is an unfair uncompromising position given how private bondholders had agreed to a haircut themselves. Why should the other sector be any different?
Right now, Greece is utterly dependent on bailout money from the Troika to run its government. The bailout money has been the carrot for various necessary reforms in Greece. The Troika wants Greece to execute those reforms before releasing the bailout money. With the Greek tight on money, bankruptcy looms.
If it was not for all the European complications, an outright default would have been the best way forward. It is clear that Greece cannot pay whatever it borrowed and the world might as well accept it and more on. Greece will undergo severe pain (it is already there anyway) but at least, it would have smaller or no debt at all after that. Greece can start afresh.
I think, the best is for the Troika, the government creditors as well as the ECB especially to peg debt forgiveness with the pace of reform, just as The Economist proposed. That would be better than pegging the bailout money to reform. Bailout money only increases the burden of debt for Greece and I am unsure how that would help in the long run. Considerable amount of government revenue would continue to go into servicing those old and new debts and only limited residual resources would be available for Greece to invest in itself. A debt relief program may enable Greece to invest in itself and carry itself out of the hole sooner than the ongoing bailout program can.
Austerity is a pain,
with you drawing the wain,
but that’s the only way,
after your jolly days.
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[2515] Watch out for those CDS
For those who have been following the Greek crisis, they know that March 8 is the deadline for the bond swap that is essential in ensuring an orderly default of Greek bonds. Just 12 days later, Greece is due for repayment that without any haircut to its bondholders, there would be a chaotic default.
The bond swap plan is essential in keeping Greek public finance under control, however arbitrary the preferred debt-to-GDP ratio is. According to the Debt Sustainability Analysis paper dated February 15 leaked during the Greek debt negotiation, a 5% reduction in bond swap participation will increase the debt-to-GDP ratio by 2%. And the baseline assumes 95% take-up rate to reach 129% debt-to-GDP ratio. The magic number is 120% and in order to achieve that ratio, the take-up rate has to be high.
Here is the problem. Some bondholders may have bought credit default swaps in anticipation of a technical default some time back. It is in their best interest to not participate in the Greek bond swaps and trigger the CDS. Participation in the swap will not trigger the CDS.
The deal with the CDS is tricky. I myself am a bit unclear if holding the precarious Greek bonds until maturity and default will actually trigger the CDS. A broker told me just now that there are so many CDS with varying conditions that it is impossible to know just which CDS will trigger. Ultimately, what is unclear is which is better: the haircut bonds or the payout from the CDS?
I am betting some will in event of plain old default and that will be the reason for some to reject of the bond swap deal. Big enough a rejection and we will find ourselves in a financial whirlwind all over again.