EU to accept that Greece should default on some of its bonds

Mr_Mumble

FT's lead story this morning (£):

EU stance shifts on Greece default

European leaders are for the first time prepared to accept that Athens should default on some of its bonds as part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.

The new strategy, to be discussed at a Brussels meeting of eurozone finance ministers on Monday, could also include new concessions by Greece’s European lenders to reduce Athens’ debt, such as further lowering interest rates on bail-out loans and a broad-based bond buyback programme. It also marks the possible abandonment of a French-backed plan for banks to roll-over their Greek debt.

“The basic goal is to reduce the debt burden of Greece both through actions of the private sector and the public sector,” said one senior European official involved in negotiations.

Officials cautioned the new tack was still in the early stages, and final details were not expected until late summer. But if the strategy were agreed, it would mark a significant shift in the 18-month struggle to contain the eurozone debt crisis.

Until now, European leaders have been reluctant to back any plan categorised as a default for fear it could lead to a flight by investors from all bonds issued by peripheral eurozone countries – including Italy and Spain, the eurozone’s third and fourth largest economies.

Yields on Italian bonds, which move inversely to prices, rose sharply last week due to the Greek uncertainty. Senior European leaders – including Jean-Claude Trichet, European Central Bank chief, and Jean-Claude Junker, head of the euro group – are to meet top European Union officials ahead of Monday’s finance ministers’ gathering amidst growing fears of contagion.

Looks like worries of contagion to Spain and Italy have finally gotten the powers that be to cauterise Greece and allow it to partially default. Fourteen months too late imho.

pqrdef

Mr_Mumble wrote: »

Looks like worries of contagion to Spain and Italy have finally gotten the powers that be to cauterise Greece and allow it to partially default.

Like that's going to prevent contagion.

Sovereign debt is secured entirely on confidence. Everything the Eurozone does seems designed to undermine confidence, drive interest rates up, and exacerbate the vicious spiral.

michaels

I guess the 'arm twisted' debt roll over was obviously a default and thus had all the downside of default with none of the upside of a haircut that (might) put the debt on a sustainable path and thus allow interest rates to fall to non-distressed levels.

The money is gone and will need to be written off either via default or forgiveness, I guess this is now sinking in, but politically it remains a hard sell.

JasonLVC

I post regular updates on the Euro elsewhere on the forums, but had this currency update emailed to me this morning from a currency exchange service provider :-

"The euro has taken yet another blow from a report indicating that the ECB is seeking to set up a fund to include aid for Italy. In addition, there have been some admissions by EU leaders that Greece should default on some of its bonds when a resolution finally arrives. If this sets a precedent for crises elsewhere in the eurozone down the line, then bondholders are right to be very concerned."

"This pair is now trading at a healthier €1.13 level and given the peripheral debt news from over the weekend, sterling looks fairly well-supported. News from today’s emergency meeting of EU officials may hold focus today. "

The upshot is the Pound has gained slightly on the Euro, just in time for the summer holiday break - it seems the Euro crisis is not over yet!

pqrdef

michaels wrote: »

I guess the 'arm twisted' debt roll over

Well if the French banks were keen to "throw good money after bad" as they would normally call it, it does kind of expose how desperate they were not to write off the Greek debt on their balance sheets.

michaels wrote: »

was obviously a default

So how else is the Eurozone supposed to work? Since the weaker economies can't become Germans overnight - or ever, probably - they were always going to need a dripfeed of central support. Either cheap loans from the ECB, or printing euros to create some inflation. This crisis is coming to a head now because nobody seems to have realised that sooner.

michaels

So is it a default?

http://www.bbc.co.uk/news/business-14239794

If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

Loughton_Monkey

michaels wrote: »

......If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

That's always the trouble with coots.....

drc

Can anyone explain what this means in layman's terms, especially for us here in the UK? Generali...?

Loughton_Monkey

drc wrote: »

Can anyone explain what this means in layman's terms, especially for us here in the UK? Generali...?

So Greece is allowed to 'default' [not pay back] some of its bonds.

French and German Banks, who own a lot of this debt, take a 'haircut'. These banks will require bailing out by French & German governments.

Greece will not get any further loans, so will default even more. So iterate the above process a few times.

Britain will no longer be able to sell to Greece. Sales to the rest of Europe will fall dramatically as they rein in spending.

Britain goes into recession again. Government has to increase borrowing. This comes at draconian higher rates, perversely causing the need for even greater loans at even higher interest. Ditto France, Germany, and most of Europe. [Contagion]

Starting with Eurozone, the whole of Europe plunges deeply into recession. IMF goes bankrupt. Britain quickly follows. Trade virtually ceases.

Poverty, famine, riots, wars, and corruption - at a scale previously only known in Africa - hit the entire European continent.

.........

Once the population has been decimated by 50%, and the remainder have 'fully come to terms with' the sins of over-spending, the folly of Brother Brown's profligacy, and the idiocy of recruiting so many Bouncy Castle Attendants, China will write out a cheque, from petty cash, to neutralise all the debts and clear up the balance sheets so we re-build ourselves and once again become a large market for China.

nearlynew

Does it mean that if I have something that someone in greece wants and they have something I want we cannot exchange?

michaels

Good - I see I have another covert to the 70 pence club...

Loughton_Monkey wrote: »

So Greece is allowed to 'default' [not pay back] some of its bonds.

French and German Banks, who own a lot of this debt, take a 'haircut'. These banks will require bailing out by French & German governments.

Greece will not get any further loans, so will default even more. So iterate the above process a few times.

Britain will no longer be able to sell to Greece. Sales to the rest of Europe will fall dramatically as they rein in spending.

Britain goes into recession again. Government has to increase borrowing. This comes at draconian higher rates, perversely causing the need for even greater loans at even higher interest. Ditto France, Germany, and most of Europe. [Contagion]

Starting with Eurozone, the whole of Europe plunges deeply into recession. IMF goes bankrupt. Britain quickly follows. Trade virtually ceases.

Poverty, famine, riots, wars, and corruption - at a scale previously only known in Africa - hit the entire European continent.

.........

Once the population has been decimated by 50%, and the remainder have 'fully come to terms with' the sins of over-spending, the folly of Brother Brown's profligacy, and the idiocy of recruiting so many Bouncy Castle Attendants, China will write out a cheque, from petty cash, to neutralise all the debts and clear up the balance sheets so we re-build ourselves and once again become a large market for China.