British Paper Reports Expectations of Greek Default, and Writedown by 50% of Greek Debt

If So, Next Step, Bailing out Europe's Banks, Again

The reality bug may be biting European financial and political leaders as The Independent, a leading British newspaper reports that European officials now expect that a possible Greek default on its sovereign debt will occur.  Here is the gloomy news.



The Blue Thing is Europe's Banks
The Person with the bucket is Europe



Unconfirmed reports circulated yesterday that G20 leaders have recognised that the Athens government cannot cope with the scale of its debt burden and that there will eventually need to be a considerable reduction in the face value of Greek debt. The Finance Minister, Evangelos Venizelos, was quoted by two Greek newspapers as suggesting that a 50 per cent writedown for the holders of Greek bonds would be the "best option".

At this time there is no official confirmation of any plan for a default by Greece and a writedown of its debt by that amount.  In fact officials will try to discourage any such speculation, since even if this were not the case, rampant speculation that it was the case may indeed cause the case to happen even if it otherwise would not.

  Britain’s Finance Minister,

Chancellor, George Osborne, said: "There is a recognition here that the global debt crisis has entered a dangerous phase." Asked whether the G20 was preparing for a Greek default, he tried to dampen speculation by saying: "No one has put forward a plan for a Greek default."

Not exactly the clear repudiation of the unconfirmed reports everyone would like to have.

The big problem, (other than the big problem that Greece will have dealing with another severe blow to its economy and society) will be the European banks that hold huge amounts of Greek debt.  The European nations will have to step in and provide new capital to the banks, once again bailing out a financial system that was unable to manage itself in anywhere near an appropriate manner.

The priority of national policymakers now, apparently, is to contain the impact by recapitalising banks and boosting the powers of the European bailout fund by the time of the next G20 meeting in November.

See, mismanagement in banking is a universal characteristic, not something confined to the United States.  And here we have just one more reason why more rather than less regulation of the financial system is needed.