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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.
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.
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
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 If you only spend 20 minutes of the rest of your life on economics, go spend them here.
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
But yes, realising a 50 % haircut will be more painful for people who have not booked it already.
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
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.
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