Unless It’s a Typo, Greece is Going to Default on Its Default!

Buried amidst the details of today’s Financial Times account of the Greek default was  a sensational figure. If I understand it correctly, it said that the “new” Greek bonds are trading in grey markets at 28 to 40 cents to the Euro. Following this was the remarkable statement that, in effect, said that  markets anticipate that Greece will default on its default.

Banks that exchanged “old” for “new” Greek bonds got about 47 cents on the Euro. If they were to turn around and sell them on the market at 40 cents on the Euro, they would get about 18 cents per Euro on their “old” bonds. Or did I miss something?

I also believe that the European Central Bank has agreed to accept the “new” Greek debt as collateral at their full face value. If so, the European Central Bank will be holding collateral assets that are overvalued by 60 percent.

Maybe I am missing something, but if I am right, this sounds sort of crazy to me. Can someone help me out on this?

“Voluntary Exchange” of Greek Debt? And There Goes Another Market

Credit default swaps are default insurance for corporate and sovereign bonds, to be paid in the event of the restructuring of the debt, a failure to pay coupons or principal on the bonds, or a bankruptcy.

The International Swaps and Derivatives Association's EMEA Determinations Committee voted yesterday that no “event” had occurred despite the Greek parliament’s passage of legislation that forces private creditors to accept losses on their holdings.

The Greeks and banks that sold credit default swaps had hoped to avoid triggering the credit default swaps by claiming that the swap of Greek bonds for “new” bonds at a loss of 53.5 percent was “voluntary.” The problem with this argument was that a number of private lenders were not willing to go along. Now the Greek parliament has legislated that they must.

So we now have a restructuring that is not a restructuring. We’ll have a default that is not a default. We now use semantics to solve inconvenient problems in new virtual universe of finance.

Greece’s long term problem is that lenders do not trust it to meet its obligations. I trust that memories are long. Such arbitrary action against private lenders and against holders of credit default swaps will only delay Greece’s return to credit markets.  Moreover, they cast a pall over sovereign debt, the cost of which  will be borne by borrowers generally.

Holders of credit default swaps join Chrysler’s secured lenders.

Inconvenient Facts: If Only the State Ran Banks

A demand of the occupy Wall Street crowd is to nationalize banks and have the state rigidly regulate risk. The reason for the world financial crisis is the greed of bankers and financiers throughout the world. We would be safe if we let the state handle such matters, they say. The state would get rid of “risky schemes”  like the infamous credit-default swaps traded by financial institutions and threatening their solvency.

European bank regulators have published the list of the ten  European banks with the greatest exposure to Portugal, Italy, Ireland, Greece and Spain.

Of these ten, only three are privately owned. Three are owned by German state governments and France and Belgium. Four are owned by cooperatives.

These figures suggest that private banks did better than state and cooperative banks in managing risk. I thought state and cooperative ownership were supposed to eliminate excessive risk taking.