The Greek Bailout Isn't the Real Story
Last week's big financial headline was about the Greek bailout. This time the bailout was for about $179 billion. This isn't the first time the Greek government's debt has been bailed out. I suspect it won't be the last. How about we apply some of our reason and common sense to this never-ending issue that never gets resolved and keeps threatening.
The first thing you notice is what the word "bailout" means. It's not that anyone's paying off Greece's debt or anything. It's that the EU arranged for the existing debt - much of which is due shortly - to be "swapped" for longer-term debt. So the people who lent money to Greece won't be getting their principal back for a while. Not only won't they get back their principal, but they agreed to take a "haircut" of over 50% (53.5%) on the principal value of the current bonds being swapped for new bonds.
Let's think about this. Why would the EU do this? Using our reason, and knowing a few facts, we might come up with the following answer.
First, the facts. You can probably figure out that the banks who hold this debt don't want the Greek government to default on the debt. That would mean that the banks wouldn't get back any of their their principal. And since the Greek bonds these banks hold are part of the banks' assets. The banks would have to declare these assets worthless. At least with the "haircut" they'll be able to keep the bonds on their books as an asset.
First question: Will Greece be able to pay the interest rate on the reduced principal value? Who knows? Every other attempt to re-structure Greek debt hasn't worked, so I don't know why we should believe this one will. For the Greek government to pay the interest, they need to take in enough revenue from taxation to provide them with the means of payment. And the Greek economy has been in a Depression for the last five years. Their GDP continues to fall. Falling GDP means they're taking in less in taxes. Where will they get the money to pay the interest on these bonds?
If this is starting to look like kicking the can down the road again, you're right. But that's not the real story.
To find the real story, we have to first consider the banks who were counter-parties to the credit default swaps that were sold as "insurance" on these Greek bonds. The fact is that a 53.5% haircut on the principal of those bonds "should have" triggered a "default" according to the terms of the credit default swaps. But if that happened the banks who sold these CDSs would have to pay out billions. And then those banks would take a hit. So they rigged a deal with the ISDA (the organization that governs the terms of OTC derivatives - CDS are a form of OTC derivative - and would decide that there was a default) and the ISDA didn't do what they were supposed to do and call a default a default. But we won't spend any more time on that now. Because the real story lies behind all these financial shenanigans.
The real real story is what all this is doing to the Greek people - not the government or the banks. The recent riots in Greece were the worst ever. They were covered by the press, but not really in a way that explains just how bad things are in Greece for many of the Greek people.
I just read a rather daunting analysis of the situation. The health care system (hospitals, pharmacies, doctors) is falling apart. Suicides are up 40%. People are giving their children to State agencies because they can't afford to feed them. Violent crime, including murder, is up almost 100%, businesses are shutting their doors. Basically the country is on the verge of collapse.
We're reading too much about all this financial fumbling and losing sight of the real story here. We're past the point where complaining about how Greek people were lazy and had it easy with their early pensions, short work days, lots of vacation time and all that. Maybe that was true in the past. It's not now. Things have taken a dramatic turn for the worse and if allowed to continue, we'll probably be witnessing a humanitarian catastrophe, along with social disruption leading to revolution.
So what are we doing spending so much time talking about the can-kicking shenanigans of the government and the banks? The lives and welfare of millions of people are at stake here.
The next time you read about how the new central bank crew running the ECB are such financial geniuses for putting together the most recent Greek bailout, think about this.
The first thing you notice is what the word "bailout" means. It's not that anyone's paying off Greece's debt or anything. It's that the EU arranged for the existing debt - much of which is due shortly - to be "swapped" for longer-term debt. So the people who lent money to Greece won't be getting their principal back for a while. Not only won't they get back their principal, but they agreed to take a "haircut" of over 50% (53.5%) on the principal value of the current bonds being swapped for new bonds.
Let's think about this. Why would the EU do this? Using our reason, and knowing a few facts, we might come up with the following answer.
First, the facts. You can probably figure out that the banks who hold this debt don't want the Greek government to default on the debt. That would mean that the banks wouldn't get back any of their their principal. And since the Greek bonds these banks hold are part of the banks' assets. The banks would have to declare these assets worthless. At least with the "haircut" they'll be able to keep the bonds on their books as an asset.
First question: Will Greece be able to pay the interest rate on the reduced principal value? Who knows? Every other attempt to re-structure Greek debt hasn't worked, so I don't know why we should believe this one will. For the Greek government to pay the interest, they need to take in enough revenue from taxation to provide them with the means of payment. And the Greek economy has been in a Depression for the last five years. Their GDP continues to fall. Falling GDP means they're taking in less in taxes. Where will they get the money to pay the interest on these bonds?
If this is starting to look like kicking the can down the road again, you're right. But that's not the real story.
To find the real story, we have to first consider the banks who were counter-parties to the credit default swaps that were sold as "insurance" on these Greek bonds. The fact is that a 53.5% haircut on the principal of those bonds "should have" triggered a "default" according to the terms of the credit default swaps. But if that happened the banks who sold these CDSs would have to pay out billions. And then those banks would take a hit. So they rigged a deal with the ISDA (the organization that governs the terms of OTC derivatives - CDS are a form of OTC derivative - and would decide that there was a default) and the ISDA didn't do what they were supposed to do and call a default a default. But we won't spend any more time on that now. Because the real story lies behind all these financial shenanigans.
The real real story is what all this is doing to the Greek people - not the government or the banks. The recent riots in Greece were the worst ever. They were covered by the press, but not really in a way that explains just how bad things are in Greece for many of the Greek people.
I just read a rather daunting analysis of the situation. The health care system (hospitals, pharmacies, doctors) is falling apart. Suicides are up 40%. People are giving their children to State agencies because they can't afford to feed them. Violent crime, including murder, is up almost 100%, businesses are shutting their doors. Basically the country is on the verge of collapse.
We're reading too much about all this financial fumbling and losing sight of the real story here. We're past the point where complaining about how Greek people were lazy and had it easy with their early pensions, short work days, lots of vacation time and all that. Maybe that was true in the past. It's not now. Things have taken a dramatic turn for the worse and if allowed to continue, we'll probably be witnessing a humanitarian catastrophe, along with social disruption leading to revolution.
So what are we doing spending so much time talking about the can-kicking shenanigans of the government and the banks? The lives and welfare of millions of people are at stake here.
The next time you read about how the new central bank crew running the ECB are such financial geniuses for putting together the most recent Greek bailout, think about this.
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