(10 am. – promoted by ek hornbeck)
The Asia markets rose this morning after the news that Greece has reached a settlement with at least 90% of its bond holders:
The finance ministry said 85.8 percent of its 177 billion euros in bonds regulated under Greek law had been tendered, adding that the rate would reach 95.7 percent with the use of collective action clauses to enforce the deal on creditors who refused to take part voluntarily.
The result should clear the way for the European Union and International Monetary Fund to release a 130 billion euro bailout package agreed with Greece last month. [..]
The biggest sovereign debt restructuring in history will see bond holders accept losses of some 74 percent on the value of their investments in a deal that will cut more than 100 billion euros from Greece’s crippling public debt.
The unknown consequence of this agreement is that it may trigger the credit default swap (CDS) insurance that some investors hold on the bonds. Some economists don’t believe that this would be a problem:
Finance ministers from the 16 other countries that use the euro are to discuss the deal’s results in a conference call later Friday. The International Swaps and Derivatives Association said it would also meet to determine whether the deal would be deemed a so-called “credit event” – a technical default – which would trigger the payment of credit default swaps, which is essentially insurance against a default.
When the debt relief plan was first announced last year, eurozone leaders and the ECB worked hard to avoid a credit event, because they feared the a payout of CDS could destabilize big financial institutions that sold them.
However, since then a CDS payout has started to look less threatening. The ISDA, a private organization that decides on credit events, said that if they are triggered, overall payouts on CDS linked to Greece will be below $3.2 billion. That amount is spread over many financial firms and likely too small to significantly hurt any one of them.
However, the outlook for economic growth anytime soon is grim. The problems that have been inflicted on the average Greek citizen by the austerity measures of this deal still exist and it’s predicted, the situation for them will not be improving for years:
It’s stunning here in Athens to see many traffic lights not working, to see beggars pawing through garbage for food, to see blackened ruins of shops burned in rioting. I was even greeted by a homeless man who spoke impeccable British-accented English.
That man, Michael A. Kambouroglou, 35, claims that he studied English literature at Cambridge University and worked for years in the tourism industry, most recently at a five-star hotel. He told me that he had enjoyed a good life, visiting the United States and traveling around the world, until the day nearly a year ago when the collapsing economy caught up with him, and he was laid off.
“To be honest, I never thought it could come to me,” he recalled. “It happened in a flash.” Kambouroglou says he goes out every morning, knocking on doors and looking for work, but in this economy it seems hopeless. The overall unemployment rate here is 21 percent – 48 percent among young people – and the European Union forecasts that the Greek economy (and all of the euro zone) will shrink further this year.
Without economic growth, the deal may only be buying a little time before it all goes back to square one. There are those who believe that this is just stalling the inevitable default and that the sooner Greece defaults the faster the pain for the Greek people will be relived:
Greece has defaulted five times since 1800, most recently in 1932.
Clearly, Greek’s own experiences reveal there is, indeed, life after default. So what’s the country waiting for?
Well, if its leaders are afraid a default won’t be tolerated in modern times, they need to consider the most recent examples set by Russia and Argentina…
In 1998, Russia defaulted on $40 billion in local debt. Within two years, its economy was growing by double-digit rates. And it continued to do so for the better part of a decade under Vladimir Putin’s leadership.
In late 2001, Argentina defaulted on $95 billion in debt. Yet, by the end of 2002, its economy returned to growth. And it continued growing for eight straight years. [..]
Bottom line: As Howard Davies, a former U.K. central banker and financial regulator, says, “It’s too late for Greece [to avoid default].” So let’s pull off the Band-Aid already and get it over with.
It won’t be painless or even remotely enjoyable. But it’s necessary if Greece ever wants to get its financial house in order and its economy growing again.