
Greece defaults - MaysonL
http://blogs.reuters.com/felix-salmon/2011/07/21/greece-defaults/
======
adulau
"The total official financing will amount to an estimated 109 billion euro.
This programme will be designed, notably through lower interest rates and
extended maturities, to decisively improve the debt sustainability and
refinancing profile of Greece."

Markets and especially the financial sector like banks (especially French
banks) owning debt from Greece (or CDO) have positively reacted to the
announce for a different reason that the one shown in the press IMHO. The
major risk for the banks is the inability from a customer to pay their debt.
With the current proposal the risk is again moved to the public sector where
they will take the part of the debt that Greece cannot pay or pay with
difficulties.

So for the banks, it's a great move as their current contribution is just a
small part from their revenue removed of the interest rate on the debt while
lowering down the risks of unpaid debt.

Without forgetting that the ECB is feeding the banks with a preferential rate
(around 1%) for credit given to other countries by the banks with a higher
rate (around 3-4%).

So the winner is clearly the financial sector. We removed the risks for you
and States will cover by public financing. It's just like the "refinancing"
for CDO in 2008...

~~~
abrenzel
Absolutely. Indeed risk is not even just about the "customer's" (in this case,
the nation of Greece) inability to pay, but also counterparty risk. It's not
just Deutschebank that's on the hook for defaulted Greek debt, but every
counterparty who wrote them credit default swaps (CDS) on that debt. That's
what triggered the financial crisis in 2008 - as Bear Stearns' and Lehman
Brothers' cash flow from their debt holdings dried up, redemption calls for
their CDS metastasized though the financial system.

If anyone is wondering why the core Euro-area (not to mention the US
government) is so concerned about Greek (and Irish and Portuguese and Spanish
and Italian) debt, it's less about some abstract political commitment to EU
unity than it is the simple fact that a true default will destroy the European
banking system.

Throwing cheap cash at the problem will work until the day that it suddenly
doesn't. While the proximate cause to the original financial crisis was cash
flow, that is not the ultimate cause for these problems. The problem is that
risk in the financial system is (still!) extremely opaque, and it is not so
much that banks are illiquid as there is almost no circumstance in which they
could procure enough cash to meet calls on their outstanding CDS in the event
of some "unexpected" event like subprime mortages or Greece going into
default.

The US government learned the hard way what would happen if they allowed one
of these overlevered banks to go under as they did with Lehman Brothers in
2008. On the other hand, national governments do not have enough capital to
possibly cover the total liabilities in the financial system, nor can they
even predict when and where that capital might be needed.

As with many things in life, there is no real good solution to this, and there
is still lots of pain ahead.

~~~
tankenmate
There is a good solution, namely this, transparency. Just like the law
requires manufacturers of food to label what goes into the box, so sellers of
aggregated derivatives should label what goes into their CDOs, CDSs, etc. This
would enable to buyer to have half a chance at assessing the risk attached.
Seller won't do this however until they are forced to do it because they don't
want to say what is in the secret sauce. The only reason I can fathom that
someone would want to buy a "mystery gift" derivative is greed.

As Warren Buffet says, "I hold my nose and point towards Wall Street."

~~~
mdda
But the contents of each CDO and CDS was/is completely transparent to the
buyer and seller. Maybe the buyers were less sophisticated than the sellers,
but that's really too convenient an excuse. The whole CDO construction process
was openly called 'Ratings Arbitrage' after all.

I agree that things should be transparent : And so the right thing to do is to
force all CDS to clear vs. a central counterparty, with publicly known mark-
to-market pricing. Similarly, banks should be required to mark-to-market on an
arms-length basis. But somehow this legislation never gets passed...

------
lefstathiou
FYI there is no such thing as a "kind of" or "selective" default. It's binary.
You either pay back creditors what they are owed or you dont. It's rare that a
company or country defaults on ALL obligations all at once. As a member of
Wall Street, I appreciate the WSJ's noble attempt to sugar coat this (article
below) but that doesnt change the facts.

Ditto watchandwait below.., glad it finally happened.

[http://professional.wsj.com/article/SB1000142405311190355490...](http://professional.wsj.com/article/SB10001424053111903554904576459310597648944.html?mod=WSJPRO_hpp_LEFTTopStories)

~~~
joe_the_user
Wait a gosh-darn-second - if the situation is either definite default OR not-
a-default, then Greece has NOT defaulted.

From the article: _if you’re a holder of Greek bonds right now, you have three
choices... 1. You can do nothing, and hope that Greece pays you in full and on
time. (and other stuff)... The first option is by far the most interesting. No
one has come out and said that Greece is going to default on bondholders who
don’t exchange their bonds;_

IE, the aim is to threaten and arm-twisted big banks into exchanging their
bonds without any formal default happening. If we're going by a "gold
standard", _when_ Greece actually misses a payment on its bonds, then it will
have defaulted. Until then, this is negotiation.

Further from the article: _"Is it possible for other bondholders — those who
haven’t had their arms twisted — to free-ride on the back of this deal and
continue to get paid in full? I suspect that it probably is. Which is one
reason why this Greek restructuring won’t be the last."_

Again, nothing has happen to the non-big-bank holders. Indeed, they get a
convenient free-ride.

~~~
richardw
The ratings agencies have said that arm-twisting bondholders to accept new
bonds with less favourable conditions amounts to a default.

I promise to pay you $100 tomorrow. I then tell you you'll get your money in
30 years and at a much lower interest rate. That's breaking the original
promise, even though I haven't actually 'not paid you back'.

~~~
_delirium
I don't think it's a default in that example until tomorrow comes and I fail
to hand over the $100. Until then we're just negotiating and speculating about
whether I will or won't hand it over.

~~~
mdda
Then people with an interest in Greece defaulting will buy a small amount of
all the short-term debt they can find, and play hardball as it comes due.

------
afiler
Seeing the title "Greece defaults" made me things had taken a turn for the
worse compared to news I'd heard earlier in the day, but no, this is just the
title of an opinion piece. Other news articles are more nuanced, and in
particular, the Wall Street Journal asks "What Constitutes a Greek Default?
And Who Decides?":
[http://online.wsj.com/article/SB1000142405311190346110457645...](http://online.wsj.com/article/SB10001424053111903461104576459972311740468.html)

------
marshray
The WSJ's article is like all "I have a friend who thinks she might be a
teensey weeensey little bit pregnant...".

Tomorrow, the markets make an example out of Greece in order to send a message
to the US. But they'd better watch out, it could backfire. Congress now has a
taste of the thrill of writing a (raise pinky) one trillion dollar check. If
another AIG starts to look shaky...

------
ww520
I've gone through the News channel in topchan.tv, which has multiple sources.
Out of 180 of news clips for today, only four are related to the Greek
bailout. AlJazeera has more details and it mentioned partial default, in the
sense that the lenders would take a loss.

france24: Fresh multi-billion euro bailout expected for Greece
<http://www.topchan.tv/show/public1/1/News/2011-07-21.06.h/58>

france24: Sarkozy and Merkel strike deal ahead of Greece talks
<http://www.topchan.tv/show/public1/1/News/2011-07-21.06.h/59>

Euronews: Nervous Greeks await their economic fate
<http://www.topchan.tv/show/public1/1/News/2011-07-21.18.h/7>

AlJazeeraEnglish: Greece's second bailout
<http://www.topchan.tv/show/public1/1/News/2011-07-21.18.h/11>

------
flocial
The EU sort of rescued Greece, now Greece sort of defaults. Portugal, Spain,
and Italy are not that far behind. The biggest problem, aside from Greece's
fiscal mess, is that Germany can't muster up enough political support to clean
up after their mess more decisively despite the fact that they are now in the
same monetary union. The catch 22 of these financial crises is that inaction
will result in financial meltdown, decisive rescues political suicide.

~~~
dialtone
Delayed action though leads to speculation and uncertainty as was shown in the
past few weeks. Nothing changed in the Italian economic policy since friday
last week, but monday and tuesday brought deep losses and the Italian BTP
bonds reached the highest spread against the Bund in recent history. Today, 3
days later, Italy is back to a less crazy spread (still pretty high) and
_nothing_ changed in its policy, 100 base points less over 300 in 3 days is
pretty crazy.

The problem is not an economic problem but a political one. The cost of Greece
bailout is a rounding error in Europe's total budget, the test ahead is about
how the EU can start unifying the economic policy and grow more cohesively.

Lots of countries gave up monetary control power but without a unifying
economic government body it's absolutely impossible for the weakest links to
survive with all their issues without some help.

Lack of real unification is the problem, not economy per se. I think this is
your point somewhat, am I right?

~~~
flocial
Thanks for the help. As you say, original detractors emphasized that Greece
was at most a little over 2% of the EU economy but we've all seen how one bad
apple can take down the whole barrel. Perhaps they need a stronger ECB. DSK
was doing a commendable job holding it together until he got stopped in NY.

------
mbateman
From the info box on this story in the print edition of the WSJ article this
morning:

\---

 _Q:There has been concern about a "credit event" that could trigger payouts
on credit default swaps, a type of insurance against default. Will this
happen?

A: Probably not. The deal for private-sector contributions is voluntary. If a
deal doesn't bind all bondholders, it's unlikely to be considered a credit
event.

Q:What use is default insurance if there's a default and no payouts?

A: Good question. It may lead to some soul-searching in the CDS market._

\---

So the financial instruments designed to insure against default are being
bypassed by deliberately circuitous arrangements and language, to the point
that people are wondering what they are even for anymore? That sure seems like
strong evidence in favor of the OP's position.

------
parallel
As I understand it you default on a loan, you don't default as an entity. So
it's doesn't really make sense to talk about Greece defaulting without saying
which loans they defaulted on. Hence the "kind of"/"selective" etc.

I read this as Greece defaulted on kind of all it's loans, so defaulted on
some and not on others. The others may have been renegotiations, longer terms
etc.

~~~
mdda
Typically (for a company at least), debt has 'cross-default' provisions in it.
So that failure to pay any particular creditor causes legal triggers to trip
on every piece of debt. This is prevent the company persecuting particular
sets of holders, and makes it a huge incentive not to miss payments to anyone.

The problem with the arm-twisting idea is that it only requires one hold-out,
and everyone gets pulled through the default process.

~~~
parallel
Right, I didn't realise that mechanism existed, thanks for the heads up. It
makes sense, removing the opportunity for slippery dealings with preferential
treatment of some debt over the rest.

------
pandaassembly
Finally the only right move to do. If you look at greece's huge debt, it was
clear that - even in booming economic times - they could have never managed to
pay it all back.

Yes the greece default rating, will bring some pressure to the (mostly
europrean) banks, but I'm sure the world will not stop moving, it might
actually be the first step out of the euro crisis.

------
eegilbert
Greece ^kinda defaults. More context in NYT, of course:
<http://nyti.ms/pyJ9Ho>

~~~
chailatte
Ah, yes. Cover your ears. Don't wanna scare the kids. More mass media
brainwashing euphemisms.

Default -> Temporary/Kind of/Selective Default

Great Depression -> Great Recession

Worthless Mortgages -> Troubled Assets

Make dollar worthless -> Increase Liquidity

~~~
jackpirate
Are you serious!?

You've got it exactly backwards: media hyperinflates things to sell and get
people to watch. Our "great depression" as you call it right now is nothing
like what happened in the 30s. Comparisons just serve to fear monger.

~~~
david927
But Chailatte is right, the hyperbole goes in the direction it's needed.
Greece has defaulted. It's either principal with interest, or it's a default.
The reason for the wishy-washy phrasing is to avoid insurance claims.

Also, we're in a Depression (although not the Great Depression) and the media
never uses that term (and then happily declares the "recession" to be over) to
avoid self-fulfilling prophesy behavior. But make no mistake, we're in a
depression and the media swings its hyperbole in the direction it's needed.

------
teyc
Greece has been in fiscal deficit for so long, a loan which stays on the books
but never gets paid off reminds me of CPS where functions never return.

------
Loic
Nearly off topic, but all these debt issues make me think that this is why
"world level" currency like bitcoin can be interesting. If it starts to spread
enough to reach a critical mass over several economies, this kind of
electronic currency can be the only currency disconnected from a single
economy. The value of such currency would be function of the volume shared in
each economy using it, where economy would be the US, EU, Japan, China etc.

You could say, a bit like gold, but easier to pay with.

Note that I am not saying I endorse bitcoin or any kind of crypto currency and
recommend you to exchange your Euros/Dollars for some. For me, it is too
speculative at the moment. This is just the concept which I find interesting.

~~~
jarek
Saying the entity "EU" is a single economy but the entity "US and China" isn't
seems rather arbitrary to me. At the very least, euro is already a currency
disconnected from a single economy, being currently connected to at least two:
the relatively sane part of eurozone, and PI(B)IGS.

------
tybris
This is called debt restructuring, not defaulting.

------
naeem
This is terrifying. The possibilities of a double-dip recession turn
depression are growing by the day. Excuse me while I start working out, learn
how to use a shot-gun and develop a taste for cider while deepening my voice.

------
antimora
is Greece in default or "kind of default"?

I don't see in other headlines news.

~~~
Caligula
It mentions that they are sort of forcing bond holders to accept a lesser
payment. That seems like a kind of default.

~~~
narrator
Whether they defaulted or not is actually quite key. You see, all the CDS
(Credit default swap) holders get to demand the full face value of the Greek
debt they hold from the CDS seller if Greece has defaulted. The CDS writers
are going to take a huge bath if this happens. This is what took down AIG,
except in that case it was subprime MBS (Mortgage backed securities) CDSs that
did it.

~~~
achompas
This is an excellent question--I'm also curious to see how CDSes are affected.
Logic dictates the EU would structure this bailout so that, no, CDSes cannot
be redeemed, lest we see a bunch of insurers go under as well.

~~~
marshray
You can bet there are a lot of people making phone calls right now trying to
figure this out. My guess is that nobody knows at this point.

If this so-called "selective default" does end up being "structured" such that
markets are surprised when CDSs cannot actually be invoked, then that erosion
of confidence in the system itself might end up fueling a cascade failure even
worse than simple direct failure of some insurers.

~~~
mdda
If I were worried about this point (and a holder of a lot on CDS 'insured'
bonds), I'd get a friend that was immune to 'arm twisting' to buy 1MM of a
particular issue, and play extremely hardball with the ECB. Eventually, a
payment would not occur, and there would be a solid 'Credit Event' to trigger
all the CDS.

~~~
marshray
NYT: "Holders of short-term obligations would be able to swap their notes for
debt with longer maturities and backed by high-rated bonds. An organization
that includes most major European banks said its members would accept the
offer and expected 90 percent of all Greek bonds to be exchanged. [...]
financial institutions that own Greek bonds would effectively contribute 54
billion euros through 2014, largely by accepting reduced interest payments,
and will stretch their maturities to as long as 30 years."

I don't understand. Are 90% of Greek bonds truly held by organizations
susceptible to arm-twisting by the ECB to the tune of 54 gigaeuros?

How long is that charity coalition going to hold together once they see others
collecting on their CDS policies?

My guess is that something more than 10% those Greek bonds are held by
entities which, in reality, are for-profit corporations with shareholders that
know how to do a little arm-twisting of their own.

~~~
tomkarlo
If you're a huge national pension fund that holds both Greek debt AND, say, a
lot more Spanish debt, it's in your interest to exchange (and prevent
contagion) even if other holders are making out better by not exchanging. If
everyone refuses to exchange, Greece defaults and you could see contagion that
impacts the rest of your portfolio. Most major holders have probably already
written down the value of any Greek bonds anyway.

~~~
_delirium
I believe that's true of the large private banks also, which is part of why
this group amounting to 90% is on board. It's in the rational self-interest of
a bank like Deutsche Bank or Societe Generale to take a haircut on their
Greek-debt portfolio if it keeps the rest of their EU bond portfolio from
blowing up--- especially if they can get a deal like this one where the EU
governments partially reimburse the haircut.

~~~
marshray
OK, but what if you were using these Greek notes as collateral? Suddenly
they're downgraded and you on the phone with your lenders. Are your lenders on
board with this plan? They have reporting requirements too, it seems like you
might be under an obligation to invoke your CDS policy if at all possible.

After all, why would the world spend $B on CDSs and then not invoke them when
it came down to it?

~~~
tomkarlo
Unless the notes were a large portion of your portfolio, it's not a problem.
Given the relative size of Greece to the rest of the EU, unless you were
running the "Greek Debt Investment Fund" you're still probably better off
helping to prevent contagion and your lenders are too.

~~~
mdda
But... If I'm a hedge fund, why even own Greek debt plus the insurance? Just
buy the insurance, and burn Greece. I'd also be buying (CDS) on other tipping-
point countries, and watching the knock-on effect.

Ah : But that demonstrates how terrible CDS is, and how amoral hedge funds
are. Actually (IMHO) the fact that Greek CDS was so cheap to buy was just an
indication of how little trust people have that politicians respect the law in
European countries. It would have been far cheaper to have sorted through this
mess on day one, rather than spending taxpayer funds giving Greeks a lifeline
when the changes that they have to make were always inevitable.

And now the politicians words have been demonstrated to be completely
worthless, there'll be a lot more pain - in countries where it might otherwise
have been unnecessary.

~~~
tomkarlo
Why is buying unhedged CDS an amoral act? Is shorting a stock amoral? You
shouldn't have to own a security to buy the default insurance on it, any more
than you should have to buy a stock to own puts on it. It's a contract between
two educated and willing counterparties.

A bank might be short Greek debt because of other trading positions, and want
to sell Greek CDS to balance that position. Restricting who can buy that
security hinders it being priced right.

~~~
mdda
I actually stated the opposite : People might use this as an example of how
amoral hedgefunds are, but it turns out that they are just more clearsighted.
Ditto shorting, HFT, etc.

------
Maven911
Does anyone know where I can get more in-depth analysis of the debt soverign
crisis ? I am quite interested in the topic but most articles are just fluff
in terms of deep economic analysis

------
orenmazor
everybody is concentrating about the loans, but there was nothing being said
on the lack of social contract in Greece. sure, they get some more loans/time,
but the fact remains that the greek dont seem to want to pay their taxes.

------
melvinng
Finally, that took a while. Why didn't they do it earlier?

~~~
dataminer
Politics

------
senthilnayagam
start of a chain reaction :( but who would be next

------
paulocal
Does this mean gold and silver prices will go up? I HOPE SO!

------
joshu
well, tomorrow is gonna be fun.

~~~
Zakuzaa
why?

~~~
achompas
Markets will respond upon opening.

~~~
jeffreymcmanus
They'll respond positively because fixing a problem, even if some people lose
out, is always better than uncertainty.

~~~
nostrademons
That's how a rational person would respond. History has shown that markets are
anything but rational.

Usually, when something like this happens, people wonder how deep the iceberg
goes and who'll be next. Widespread panic usually follows.

~~~
ebaysucks
There's nothing irrational about wondering how deep the iceberg goes.

I'm always amused when people blaim the market for pointing out failed assets,
as if the process of price discovery itself is more responsible for intrinsic
value than the nature of the asset itself.

~~~
achompas
Totally agreed. Markets moved up, but a decline of the various indices would
be justified: Greece _will_ need another bailout, as this "partial default"
only deals with a little over half of Greece's outstanding debt. They still
have 140 million Euros to go.

------
kahawe
What I can still not understand: how could this have happened at all and how
come just like with the financial crisis following the housing bubble, it is
nobody's fault really, nobody gets the blame and has to answer and step down
and get locked up for it... and ultimately banks or the countries just get
their bail-out and that's it. Few months from now life will just continue as
usual as if nothing ever happened, just like it did on Wall Street. They went
right back at it.

The funniest thing, a few weeks ago it was a very popular opinion in the media
in Greece (even in respectable papers) that Germany should absolutely have to
pay since they got allegedly SOOO rich and happy on all those imports Greece
bought from Germany. Which in reality were an absolutely ridiculous amount of
like 1 or 2% of all of Greece's imports but it shows how quickly a scape goat
was conjured up in the media to direct people's attention and hate away from
their own politicians.

Seriously, how can you not blame the politicians in that country and blame
whoever was responsible for accepting Greece into the monetary union in the
first place when they downright faked their economic statistics and obviously
noone did any due-diligence?

There is a constant decline in voters and a general sense of "disenchantment
with politics" here; people just care less and less and I can really see
why... it doesn't really matter who you vote for anyway, they all get away
with whatever they want and the biggest crises of the last 10, 20, 30 years
just get brushed off like nothing happened. Insane amounts of bailouts are
paid out on the backs of the working citizens and then that's it. It is never
anybody's fault so certainly this does not scare off ANYONE to refrain from
careless, negligent conduct.

I am not trying to troll, I just really honestly do not understand it... in my
own understanding by all that is right, a few people who were actually
responsible or in charge and did not do anything to prevent it should be
hanging from trees or burning on stakes by now, figuratively speaking (but I
would not mind having it literally).

In any company a CEO conducting business like these countries are doing on a
daily basis would have been locked up a hundred times over looong time ago for
a multitude of very grave misconducts, evasion, falsification of accounts etc
etc etc.

When you rob a bank for petty cash, you get locked up; when you "steal a
movie" you get locked up even longer. When you frakk over the whole world or
the whole EU, then most everyone was joining in anyway so "shit happens",
"tough luck", let's write a check and shake hands for the media.

Can someone with more political understanding than I have put all this
clusterfuck-shitstorm into perspective for me, please?

~~~
ristretto
Here's my remarks about how the greek political system works:

\- Greece is a very recently established democracy (1974), before that greece
was like a protectorate, due to a strategic positioning in the edges of the
western-eastern block.

\- As such, previous generations used to see the state as 'the bad guy' whose
raison d'etre was to oppress citizens and maintain class inequality. So it's
natural to always try to cheat, steal from "the state" and to pass these
attitudes to their children

\- Family ties; people can get elected for having a large extended family ,
and may even end up in the parliament. Are there many developed countries
where father, son and grand-son, or uncle and nephew ALL become PMs in the
past 30 years?

\- It's difficult for new people to enter the political scene, people will not
judge you by your CV, but by your ability to trick people to vote for u.

\- The media is controlled by businessmen who traditionally have stakes in
large (mainly construction) projects. Their main goal is to distract from what
matters.

\- Justice fails to work, and blames the complex law system for that.

Despite the fact that Greece enters a 30-year period of essentially foreign
financial control, the media pretty much focuses on the triumph of no default.
Greeks in general have a tendency to hypocritically pretend black is white,
so, if anything, the deal will make the political parties who sank the whole
country in debt to look as Jesus Savior (I am greek so i hope this is not
taken as racist). I doubt anyone (hint, 2 persons: the previous prime
minister, the finance minister when we entered the euro) will ever even be
called to testify in justice about their wrongdoings. I 'm also curious to see
how the rescue plan works out after this dust settles down (september maybe).
Also interesting to see the real reaction of markets, after the August 2
distraction goes away

~~~
RyanMcGreal
> Are there many developed countries where father, son and grand-son, or uncle
> and nephew ALL become PMs in the past 30 years?

The United States springs to mind: George H.R. Bush, Jeb Bush, George W. Bush.

~~~
ry0ohki
To be fair Jeb Bush hasn't been president, and there are relatively few
dynasties in the US (there's also the Kennedy's, the Gore's, the Paul's, but
most don't make it to be President)

~~~
mdda
Funnily enough, this occurs much less in UK politics.

------
rajpaul
"kind of default" doesn't mean "Greece sort of defaulted", it means "Greece
defaulted in a specific way".

------
shareme
Translation...Greece gets a bailout for itself, bondholders offered bailout if
they commit to increase time-periods of loans, Greece bond rating gets
clobbered to default rating....

~~~
anonymoushn
I wouldn't call a 20% haircut a bailout. I would call it a default.

------
TheAlan
The raping of Greece's assets will now begin. EVERYTHING will get privatized,
just like a third-world country.

~~~
tsotha
Well, sure. Greece _is_ a third-world country. And when you owe more than you
can pay you have to cough up some assets.

~~~
jodrellblank
Greece looks First-world to me: <http://en.wikipedia.org/wiki/Third_World>

~~~
tsotha
Meh. Outdated definition.

~~~
marshray
I was in Greece a few months ago. It's definitely not a third-world country,
but it 'aint no Switzerland either.

