Restructuring and ringfencing

October 16, 2011 § Leave a comment

Oops. Recent market rally was perhaps not so well-founded:

The picture that emerges from the reports on all of the emergency meetings goes something like this: The idea now is to make Greece an exception, in the sense that bondholders will be forced to accept a 50% loss (instead of the 21% agreed on in July) on their Greek debt holdings, but they will then be given the assurance that no other Eurozone country will be allowed to restructure its debt.

If you were in Portugal, you would do well to protest any such clause, since it could squeeze you into a spot where you can forced to sit back with your hands tied behind your back and watch yourself be bled dry.

If you were a citizen of any other Eurozone country, you’d also want to raise your voice, because if Portugal, Ireland, Italy, Spain, Belgium, the list is familiar by now, cannot restructure their debt, they’re going to need money from the EU and ECB. There are renewed calls to pump more money into the IMF as well, so the rest of the world (USA) can be made to pay for the euro crisis. Not surprisingly, the US has said: no way.

Italy has €1.59 trillion ($ 2.21 trillion) in government bonds outstanding. The hope is that bondholders will accept a 50% cut on Greek debt in exchange for a guarantee that any and all losses on Italian debt will be covered by the EU and ECB. Let’s don’t forget that those bondholders are to a large extent European banks. Which under new proposals will be forced to increase their capital ratios, leading to demand for some €250 billion in new capital.

Who’s going to lend it to them? US money market funds withdrew 44% of their loans to French banks in September; guess they’re not going to play the white knight part. And seeing that just about every single bank in Europe has now been downgraded or soon will be, they will need to pay a lot more in interest, provided they even can get loans in the first place.

Automatic Earth


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