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Friday, March 09, 2012

A small step forward, but the Greek restructuring deal could prove to be a pyrrhic victory

Open Europe has responded to the agreement between the Greek government and its private creditors which laid out how much and under what format the country’s massive €360bn debt burden should be written down. The deal involved private sector bondholders agreeing to a 53.5% nominal write-down, while so-called Collective Action Clauses (CACs) will be used meaning that Greece is now technically in a state of default – precisely what EU leaders have spent two years trying to avoid. While marking a small step forward, Open Europe notes that the deal is unlikely to save Greece, and that the country is still on course for a full default in three years’ time, if not sooner.

In our response we note:
“With the use of CACs Greece has entered a coercive restructuring or default – something which Greece and the eurozone have spent two years trying to avoid. While the financial markets can handle the triggering of CDS that this will entail, at some point serious questions need to be asked over the amount of time and money which policymakers have wasted on what has ultimately amounted to a failed policy. Instead, Greece should have undergone a full restructuring combined with a series of pro-growth measures.”

“There will be plenty of optimism in the corridors of power around the eurozone today, some of it justified – Greece has avoided a chaotic and unpredictable meltdown. However, this deal could end up being a Pyrrhic victory: the debt relief for Greece is far too small which means that another default could be around the corner, while the austerity targets are wholly unrealistic and kill off growth prospects. Furthermore, Greece’s debt will end up being almost completely owned by eurozone taxpayers and by exempting official taxpayer-backed institutions from the write-down, the deal has created a distorted, two-tier bond market.”
See here for the full response.

Update 17:00: Based on our figures and projections, the Telegraph has produced a handy graphic showing the break-down of the restructuring, the details of the write-down and where the money from the second bailout will end up. View it here.


Rik said...

Like with all things on life there are positives and there are negatives.
- It doesnot solve the Greek issue.
Before we had a country with a huge debt problem,
huge stuctural problems, a rubbish management,
which was a PR disaster for the whole rescue operation,
and after the rescue we have exactly the same things.

Another very negative event in the crisis which again cost a lot of money and didnot solve anything only bought say 2 months time.

The main positive that the incompetent crisis management can see that:
triggering CDS won't kill the world,
banks/investors won't drop everything because of a restructuring they only drop the rubbish,
rubbish stays rubbish with non structural measures.
They probably will have learnt some things everything I doubt.

The main problem with the PIIGS ex Ireland is that these countries havenot made the step to the economic level of say Germany or the UK (or Japan and the US). Only their incomelevel has got pretty close to that. But now that sub-group faces competition from the China's of this world with wages say 20% of those in Spain. That competition disadvantage has to be eleminated. Part by higher wages in China, but the other part will need to be by simple cost cutting, lower wages, lower taxes, lower other costs.
Having a Western European welfarestate has simply become unaffordable.

Which brings me to the problems for the North. They might do well in competitionlists but not for good reasons. They grow 1.5-2.0% a year in good times that is imho no top10 work in that respect.
Basically the links between them and the badly in need of major restructuring South gets closer and closer with all these kicking the can measures. It will get more difficult to cut them loose. Starting with a 2.0% structural growth minus deleveraging, minus minus costs for keeping the South alive, minus aging, will lead to structural zero growth up North.
With the South being in a long term structural rebalancing act with likely negative growth, overall it looks pretty horrible. A good place to stay out as an investor.

Anonymous said...

link to Telegraph graph doesn't work.

Anonymous said...

link to Telegraph graph does not work.

Rollo said...

A defeat postponed is not a victory. Already the bond markets are reacting as the yields on Italian and Spanish debt creep up again.The bail-out was not to save Greece but to save the artificial construct that is the Euro, regardless of the crushing of Greece. But it cannot, because the main problem, that of all of the weaker states being unable to live with the Euro, has not been addressed. So the inevitable decline of Europe carries on remorselessly.

Konkurssihakemus said...

For me Greece really need to enter restructuring or default.And Greece only did what his idea on entering phrrhic victory.