Saturday, February 11, 2012

European Bailout of Greece Has a New Strategy – Make The Thing So Complicated No One Will Understand It Well Enough to Oppose It

Don’t Believe That – Try and Understand This

As Greece faces a deadline for rolling over a large chunk of its debt that comes due in March, the final details on another bailout from Europe, the ECB and the IMF are taking shape.  The first thing that will happen is that Greece will default on its debt, except it is not being called a default because it is a voluntary default, and calling the default a default would trigger all sorts of bad things.

Here is how the default that is not a default will work.

The restructuring will see Greece's private-sector bondholders receive new bonds with half the face value of the old ones and maturities of as long as 30 years. The average coupon on the new bonds is likely to be less than 4%—and well below 4% through 2020.

So the next time anyone gets into financial difficulty, just tell the creditors you are paying them 50 cents on the dollar, and will pay them in 30 years and call it a restructuring.

But wait, there is more.  The European Central Bank bought a bunch of Greek debt from banks at a discount.  So here is how they are going to help out.

The idea is for the ECB, in effect, to exchange its Greek bonds for bonds of the European Financial Stability Facility, the euro zone's temporary bailout fund. The EFSF won't hold the bonds on its balance sheet, but will return the bonds to Greece, and Greece will then agree to repay the EFSF for the price at which the fund bought the bonds from the ECB.

So the plan is for the bailout fund to give the bonds to Greece so they are in effect cancelled, except that Greece may (or may not) at some time in the future pay the bailout fund back.

What’s not to understand?  And Greece, despite all this help, is not taking all of this very well.

In Athens on Tuesday, a 24-hour walkout called by public- and private-sector unions shut banks, slowed public transport, closed schools and forced hospitals to operate with skeleton staff. Demonstrators marched by the capital's central square holding banners lashing out at austerity measures, while left-wing groups, under heavy police guard, called for revolution.

Confused, don’t be.  All will be made clear in next week’s episode.

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