It has been in the news for month now. Greece’s lender taking a 50% haircut on the their loans.
But you have to ask the question, even if all parties agree to it, is it even possible to implement?
Derivatives have caused the current economic system to become massively fragile. Derivatives are so complex very few people really understand them and very few people really know what is inside them.
Any debt restructuring in Greece is going to have knock on effects to many more securities that just Greek debt.
Greek government debt is combined with sovereign debt of other countries, with mortgages, with private bonds and so on. All these types of loans when into the melting pot and out came a derivative.
The issue is that a derivative, which contains Greek debt, is going to be effected if the Greek debt doesn’t pay out the full amount.
So it is not just the people who hold Greek government debt and the Greek government who are involved here.
Everyone who holds debt which is connected to Greek debt directly or indirectly, identified or unidentified, will be effected.
So the question is, is it even possible to really know the full effects of what a Greek default will have?
And if it is, are the people who created the derivatives clever enough to come up with new instruments which will negate the effects of a Greek default?
Assuming they can’t, and assuming the governments in Europe are merely puppets of the major banks, there is only one solution that will give Greece an orderly default AND keep the derivatives that include this defaulted debt afloat.
And that is to simply pay out regardless.
ie Greece defaults on its debt and money comes from another source in order to keep all these derivatives alive. Definitely the simplest solution but also the most dangerous.
This “other source” can come be taxpayers in Greece and Europe, or the ECB can simply print up the money.
In other words, Greece will default on its debt, but instead of that debt being written off, other parties will simply step in to keep the derivatives afloat.
Reading what I have read about how crazy the derivatives market was/is, I think this is the only way a soft Greek default can happen.
The reason it is taking so long to negotiate the structured default?
There is no much math involved and the problems are so complex, the quants simply need this much time to put something together.
Another reason it is taking so long is that it is proving hard to find the funding required to keep the derivatives afloat (the derivatives which contain the debt Greece has defaulted on)
Of course there is a third way. And that is the EU, IMF and Troika simply lend Greece the money without a plan being in place.
Merkel is dead against this because she knows it does not solve the problem. Merkel also knows that this will create inflation that will effect the savings of the German government and German people.
Sarkozy ion the other hand likes option 3.
France like Greece has massive government debt which is probably unsustainable in the long-term. Option three and the inflation that it will create effectively reduce the debts of the French government.
So option 1 is a structured default which is controlled
Option 2 is an attempted structured default which leads to unforseen consequences
Option 3 is a Greek default with the defaulted debt being put onto the books of another entity
Option 4 is to give Greece the next bailout tranche even if the Greek government has no plan in place with the country’s creditors
Which is the most likely?
If you believe the news, then option 1 is a dead certainty but it will be actually option 4 even though it looks like option 1.
Is an all out default on the cards? It is possible but what will this look like?
If you believe Greece is merely a pawn in a bigger game then things could get ugly.
If Greece is being made an example to the world then you have to assume that the regime that is in power after the default will do precisely the wrong things in order to cripple the country.
What are the wrong things?
1. Pensions, disability and unemployment benefit. Either they will stop being paid or they will be massively cut.
This is completely unneccessary. These benefits are the last things to be cut. The Greek government has so many areas from which they can cut without effecting the weakest in society.
If the Greek government does make benefit cuts the first thing on their agenda post default they it will be safe to say that the goal of the regime is serve the interests of people not living in Greece.
2. Taxes. Precisely the wrong thing to do will be to increase taxes after a default. A government focussed on destroying the country will either keep taxes at current levels or increase taxes further under the pretence of maintaining government revenue.
Taxes must be cut after a default to keep money circulating in the economy.
3. Police/Army. Police stop getting paid and are replaced by the army. Only a sadistic or incompetent regime would follow this course of action but if the end game is to make the situation in Greece so bad foreign military intervention is required this could be a possibility.
4. Bank deposits. Banks would close and savers and depositors would lose their money. A regime acting against the Greek people will not seek to reimburse the people who have lost out.
A legitimate government will attempt to recapitalise the people (not banks) who have lost money. There are currently around 170 billion Euros in deposits in Greek banks. The EU could reimburse the people directly for their losses, if they do not, then Greece may decide a return to the Drachma is the best solution.
5. Government. After default the government refuses to cut the workforce under the guise that laying off workers will increase unemployment causing more problems. I think this is a very real possibility and if it were to pan out like this, would be very damaging to the Greek economy.
These are the 5 most destructive actions I think the post default regime could do.