2 Trillion (2,000,000,000,000) bailout fund and 50% Greek Haircut - will it work?

michaels

BBC state IMF are working on a plan to increase the effective fire-power of the EFSF to EUR 2 trillion and simultaneously impose a 50% haircut on Greek debt.

Will this work?

1) The EFSF deal seems to be a bit of financial engineering (CDOs anyone) whereby EFSF funds are leveraged with ECB liquidity on the grounds that national govts will not sanction any further EFSF expansion. Seems to me however you dress this up govts are in hock for the full 2 trillion (does anyone know what stands behind the ECB?)

2) The 50% haircut on Greek debt will probably make some European banks insolvent (however I think RBS wrote Greek debt down to this level in their recent results) and thus require a recapitalisation - any one want to partake in a rights issue by French banks at the moment?!

3) What are the contagion and moral hazard risks? Greece at a stroke will have had 50% of the money they borrowed written off - hardly an incentive for the p[profligate not to get in to debt and just because the EFSF might now be big enough to rescue all the other PIIGS does not mean that their debt might not have a haircut imposed in future if it is deemed unsustainable - after all for Eire and Portugal what would the downside of pushing for a write-off be?

pqrdef

How does this enable Greece to borrow money in the markets? Greece can't pay off 1 cent of debt except by rolling it over, and the troika are stalling on lending what they've already agreed.

Graham_Devon

The best summary I have heard so far is that the only thing that will actually work, i..e can rebuild after, is a full, normal default.

Every other "plan" has loads of unanswered questions around it and every single one relies on more debt and is completely tangled in politics.

kabayiri

ECB vs the markets.

Who blinks first

michaels

I guess the theory is that if Greece has debts of 160% of GDP then lenders demand such a high risk premium on the debt that Greece can not afford to service it whereas at 80% of GDP the servicing costs are not just halved (less principal outstanding) but actually fall by a factor of 10 as the 80% is all payable at a normal rather than risk inflated interest rate.

pqrdef wrote: »

How does this enable Greece to borrow money in the markets? Greece can't pay off 1 cent of debt except by rolling it over, and the troika are stalling on lending what they've already agreed.

michaels

Does anyone know what mandate the ECB has to purchase govt debt which could potentially incur billions of EUR of losses and what the mechanism is for supplying the capital to support such losses?

kabayiri wrote: »

ECB vs the markets.

Who blinks first

gagahouse

michaels wrote: »

Does anyone know what mandate the ECB has to purchase govt debt which could potentially incur billions of EUR of losses and what the mechanism is for supplying the capital to support such losses?

–SMP Not Permanent Program And Should Tend To Decline In Size
WASHINGTON (MNI) – The European Central Bank has rules that allow
it to help stabilize markets by purchasing bonds, but quantitative
easing is not possible, Governing Council member Ewald Nowotny said
Friday.
“That is something that is unfortunately a bit under-estimated, by
American observers as well,” Nowotny, who heads the Austrian National
Bank, said in remarks to reporters during the annual meetings of the IMF
and World Bank.
“The ECB has clear rules,” he added. “Those are rules that are even
anchored in the EU Treaty and in the statutes of the ECB. In the
interest of the credibility of the institution, it is absolutely
necessary to adhere to these rules.”
He continued: “Therefore, the ECB, when it is a matter of
stabilizing market conditions, can provide an anchor. That is the
SMP-program.”

http://www.forexlive.com/blog/2011/09/23/nowotny-ecb-has-clear-rules-we-can-buy-bonds-but-no-qe/

Mrs_Bones

michaels wrote: »

BBC state IMF are working on a plan to increase the effective fire-power of the EFSF to EUR 2 trillion and simultaneously impose a 50% haircut on Greek debt.

I think working on a plan is too strong a word. They are talking about a plan but how long that talking will take and then how long to set anything up if / when anything gets decided in Europe is a bit like saying how long is a piece of string.

Something similar to the above was said today on the news by a German government minister. Nothing has been decided yet, even thought some people are talking like it has. One huge problem Europe has got is that there are many member states that need to agree to things before plans can be implemented and it all takes time.

We only have to look at the last bailout agreement that was cleared to be given to Greece in the summer, there are still problems with that and some countries / states are not happy yet, nothing moves quickly in Europe.

The markets on the other hand can move with the speed of light.

geneer

Well thats one way to deal with uppaid debt.

IronWolf

One of my friends works for an investment bank on sovereign debt, and was telling me about the dire situation the greeks are in.

No matter what they do really, unemployment is set to rocket (even if they default on debt) to levels which could reach 70%, which is pretty horrific.

RJP33

IronWolf wrote: »

One of my friends works for an investment bank on sovereign debt, and was telling me about the dire situation the greeks are in.

No matter what they do really, unemployment is set to rocket (even if they default on debt) to levels which could reach 70%, which is pretty horrific.

In a way they're actually lucky to be in the Eurozone, they get the help they need to stop them bringing down the rest of the zone.

Default with the Drachma and there would be absolute chaos with little outside help.