Welcome to the new version of European Tribune. It's just a new layout, so everything should work as before - please report bugs here.
Display:
Eurointelligence Policy Brief: Some subtle shifts in the German position (11 April, 2011)
The official position [on] debt restructuring is unchanged - that Greece will continue to follow the programme. That's everybody's official position, and it is of course not true as we all [know]. But do not expect any sudden changes in the official position, also because of Merkel's respect for George Papandreou. Merkel in particular opposes any involuntary restructuring of Greek debt until mid-2013 because she has already publically excluded that possibility following the discussions in recent months. Any decision to the contrary could cause further uncertainty in the financial markets.

To be clear: She is not actually afraid of a restructuring in the way the ECB is afraid of it. But Merkel is concerned about an adverse market reaction, which is why she gave the no default commitment until July 2013. She believes that she cannot easily go back on this date. In other words, there is also a credibility issue at stake here. She made a pledge to bondholders, which [she] is, as yet, unwilling to break.

In the finance ministry, however, the position seems to be shifting. Among all the actors involved, the finance ministers, the European Commission, the ECB, and the IMF, there is now an open discussion about whether and how to restructure Greek debt. Many high-ranking experts in Berlin, but also in the parliamentary parties, are increasing convinced that Greece will not be able to service the high level of debt after the financial assistance programme expires.

Where's that Queen of Yurp picture, again?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 14th, 2011 at 06:20:36 AM EST
that "the markets" place such a high value on her "pledge"?

The day there's no choice, it just becomes yet another Merkel flipflop. BFD.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Apr 14th, 2011 at 07:59:27 AM EST
[ Parent ]
I can assure everyone in the German government that without a very generous restructuring, and some sort of growth prospect, by 2013 there won't be much of a Greek society, let alone economy, left to follow any sort of programme. At this rate of collapse, by July 2013, Papandreou will have long escaped the country carried away by a helicopter from some government building's rooftop  (à la manière de IMF traditionnelle) and army generals/gangsters with armed goons will be running parts of the country like Somalian warlords.

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Thu Apr 14th, 2011 at 09:31:29 PM EST
[ Parent ]
Why should the German government care?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Apr 15th, 2011 at 02:39:31 AM EST
[ Parent ]
Well, I would assume that political chaos is not conducive to any form of repayment and is bad for the Eurozone generally speaking. Also political turmoil has a bad habit of spreading (as the Arab world recently has reminded us)...
Other than that, however, you're probably right

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Fri Apr 15th, 2011 at 04:21:32 AM EST
[ Parent ]
Well, default is not conducive to repayment either. And if the German banks (or at least the ones that have the ear of the BuBa) are geared as hard as I think they are, a full default won't be that much worse for them than a thirty percent haircut (which is, after all, what the bonds are trading at). You can only go bankrupt once - there are no "doubleplus insolvencies."

Further, if the Greek bonds are not repaid because the Greek are rioting in the streets, then obviously it is those brown-skinned barbarians who don't understand civilised virtues of thrift and austerity that caused the virtuous, prudent and generous German banks to go bust. Whereas if the German banks go bust because they take the same, negotiated, haircut as everybody else, then it'll be a lot harder to prevent people from arguing that the bailout should come with strings attached.

And avoiding strings on the private banking sector is the point of the exercise. Sure, they may tear Europe apart in the process. But since when does the BuBa or the EPP care about the European interest?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 05:30:16 AM EST
[ Parent ]
The 40-50% haircut in Greek bonds is already priced into the secondary market prices.

The issue here must be institutions which hold Greek bonds in "investment" books which are marked to "hold to maturity" values. Institutions which have Greek debt in "trading" books which are marked-to-market have already realised the losses.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Apr 15th, 2011 at 05:57:06 AM EST
[ Parent ]
They haven't realised them until the bonds are either sold or defaulted on.

But yes, realising a 50 % haircut will be more painful for people who have not booked it already.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 06:19:53 AM EST
[ Parent ]
So the key to the whole thing is probably the existence of large "hold to maturity" positions in German banking books, with maturity dates before 2013.

Banking regulators worthy of the name would require that banks set aside reserves to cover likely losses on "investment" books, of which the deterioration of the mark-to-market would be a basic indicator.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Apr 15th, 2011 at 06:34:46 AM EST
[ Parent ]
And competent regulators would have forced progressively larger haircuts on the private banking sector as collective exposure to foreign markets grew. But that would have required the BuBa to pay attention and police creditors instead of waxing lyrical on the moral responsibilities of debtors to fulfil mathematically impossible obligations.

The more I think about it, the more a central bank guarantee of a lower bound on the exchange rate strikes me as turning idiosyncratic risk into systemic risk. Or, if you will, socialising the cost of buying currency swaps to hedge against sudden currency movements by replacing it with restrictions on fiscal and interest rate policy.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 06:54:25 AM EST
[ Parent ]

Display:

Top Diaries

Occasional Series

24 July 2014
by dvx - Jul 23
59 comments