You don't strike when you're getting rescued. Oh wait...
The "saving of Greece" could easily top the chart of the biggest misstatements. In fact Greece, like Ireland and Portugal, may have never really needed "saving" as we understand it. For them there has always been a very simple decision - to stop paying. The EU and IMF aid, garnished with very burdensome measures of budget cuts (and the ensuing street protests and all that comes with it) has been probably the toughest of all options. Especially when there's no proper structural reform to efficiently make use of that aid in the first place (well, in Greece's case at least).
If we're to talk of anybody's "saving" at all (which is also a questionable concept), then we should start with looking at the European banks. Some of them had embarked on adventurous hoarding of Greek debt because of its attractiveneness and high profitability (but also extremely high risk), and now those same banks are threatened by huge losses worth billions of euros. If there's any clear sign that Greece's bankruptcy is more imminent than ever, it is the fact that the investors have already started evaluating which banks are the most threatened. And also how big the effect on their balances would be, and what concessions their shareholders will have to swallow.
It appears that the bulk of the Greek sovereign debt is held by banks outside of Greece, which hold a total of 72 billion euros, or 22% of all bonds on the market. They had been hoarding more and more Greek debt like crazy, which they could then use as guarantee for the credits they were taking from the European Central Bank at very low interest. And indeed, at those levels if they had to scratch off half of that amount, practically the whole bank sector of that country would have to be recapitalized.
There are several really big German and French banks which are threatened with enormous losses. A Morgan Stanley analysis found that at a 50% "haircut" (more or less the most realistical scenario at this point), BNP Paribas would have to say bye-bye to 1.7 billion euros, and Dexia to 1.3 billion.
The effect on those banks from a possible Greek restructuring isn't the main concern, though. The bankers are more frightened by the threat of infection of the whole system, not so much by the direct losses. Not only because the pressure of the markets on countries like Ireland and Portugal and the rest of the fiscally unstable countries in the European periphery would increase, but because the air of uncertainty stemming from the intransparency of those banks' budgets would ultimately make them very suspicious to one another. And that's a condition for disaster.
The desire of private investors to recapitalize banks in both the center and the periphery of the Euro-zone could drop drastically, the more the infection is spreading. And since the European banks are hoping to raise about 40 billion euros of fresh capital for this year, that threat sounds disturbing and it could force the central banks to start pouring money into the economy again, which would cause rampant inflation.
But regardless, even at this point 1/3 of the Greek debt has moved into private banks and investors and various governments and international institutions. First and foremost, the ECB holds 70 billion euros, which is 1/5 of the entire Greek debt. And according to JPMorgan analysts, if we include ECB's credits for local banks, the exposition jumps to over 200 billion euros. Based on this, we could suppose that if Greece restructures its debt with more than a 30% concession, ECB could already start reporting major losses.
Perhaps this time the rising discontent across Germany about the N'th bailout plan in a row is now pointed in the right direction. The big question now is not whether taxpayer's money should be handed to the "wasteful Greeks", not any more. The main question now could be: which would come cheaper - pouring unknown amounts of loans into the peripheral economies forever, or recapitalizing the banks in the very center of the Union which have been the driving engine of the whole process in the first place.
I mean the Baron Munchausen story about the old mofo pulling himself and his horse out of the mud by dragging himself by his own hair might sound like a nice thing, but how do you do that for real?
If we're to talk of anybody's "saving" at all (which is also a questionable concept), then we should start with looking at the European banks. Some of them had embarked on adventurous hoarding of Greek debt because of its attractiveneness and high profitability (but also extremely high risk), and now those same banks are threatened by huge losses worth billions of euros. If there's any clear sign that Greece's bankruptcy is more imminent than ever, it is the fact that the investors have already started evaluating which banks are the most threatened. And also how big the effect on their balances would be, and what concessions their shareholders will have to swallow.
It appears that the bulk of the Greek sovereign debt is held by banks outside of Greece, which hold a total of 72 billion euros, or 22% of all bonds on the market. They had been hoarding more and more Greek debt like crazy, which they could then use as guarantee for the credits they were taking from the European Central Bank at very low interest. And indeed, at those levels if they had to scratch off half of that amount, practically the whole bank sector of that country would have to be recapitalized.
There are several really big German and French banks which are threatened with enormous losses. A Morgan Stanley analysis found that at a 50% "haircut" (more or less the most realistical scenario at this point), BNP Paribas would have to say bye-bye to 1.7 billion euros, and Dexia to 1.3 billion.
The effect on those banks from a possible Greek restructuring isn't the main concern, though. The bankers are more frightened by the threat of infection of the whole system, not so much by the direct losses. Not only because the pressure of the markets on countries like Ireland and Portugal and the rest of the fiscally unstable countries in the European periphery would increase, but because the air of uncertainty stemming from the intransparency of those banks' budgets would ultimately make them very suspicious to one another. And that's a condition for disaster.
The desire of private investors to recapitalize banks in both the center and the periphery of the Euro-zone could drop drastically, the more the infection is spreading. And since the European banks are hoping to raise about 40 billion euros of fresh capital for this year, that threat sounds disturbing and it could force the central banks to start pouring money into the economy again, which would cause rampant inflation.
But regardless, even at this point 1/3 of the Greek debt has moved into private banks and investors and various governments and international institutions. First and foremost, the ECB holds 70 billion euros, which is 1/5 of the entire Greek debt. And according to JPMorgan analysts, if we include ECB's credits for local banks, the exposition jumps to over 200 billion euros. Based on this, we could suppose that if Greece restructures its debt with more than a 30% concession, ECB could already start reporting major losses.
Perhaps this time the rising discontent across Germany about the N'th bailout plan in a row is now pointed in the right direction. The big question now is not whether taxpayer's money should be handed to the "wasteful Greeks", not any more. The main question now could be: which would come cheaper - pouring unknown amounts of loans into the peripheral economies forever, or recapitalizing the banks in the very center of the Union which have been the driving engine of the whole process in the first place.
I mean the Baron Munchausen story about the old mofo pulling himself and his horse out of the mud by dragging himself by his own hair might sound like a nice thing, but how do you do that for real?