Greek Debt Face Saving Continues to Gain Support

The Important Thing is That Europeans Do Not Look Bad

Earlier The Dismal Political Economist reported on plans to temporarily solve the Greek credit crisis by getting private holders of Greek debt to swap out their maturing debentures for one with longer maturities.

European Central Bank Finds Face Saving Way to Allow Greek Default Not to be a Default

In this manner Greece could default on its maturing debt without defaulting on its maturing debt, certainly an admirable situation.

Now the WSJ reports that the plan is gaining momentum.  There are, however, problems, one of which is exactly why should private lenders (mostly German and other European banks) would go along with such a plan.  Also there is this issue.

France, for instance, has been wary of burning private creditors, and even German officials admit the deal will be difficult to push through.

Among the biggest hurdles may be the European Central Bank, which has been staunchly opposed to hurting banks and other creditors, for fear that big losses on Greek debt could catalyze a banking crisis. A senior German official said last week that if the ECB vetoes a maturity extension, governments will have little choice but to lend Greece money with only a weaker form of private-creditor involvement.

The there is this.

The structure of the proposed debt exchange suggests it is very likely to be considered a default by Standard & Poor's, which explained its methodology in a report Friday. The ratings firm said that for issuers rated at Greece's level, single-B, a "voluntary" debt exchange would likely be default if creditors received securities with terms less favorable than are available in the secondary market. Ten-year Greek debt yields 15% in the secondary market, and two-year debt yields over 20%. Officials say the exchanged debt won't be that favorable.

So if all else fails Europe is back to the program proposed here, with Germany purchasing Greece in an LBO.  That no longer sounds all that unlikely.