Buying Time on Greek Debt

Yanis Varoufakis seems to have put his finger on the instability of the latest Greek Debt deal in De Zeit.

Instead of mending its ways, Europe is now seeking a Vienna-style ‘solution’. Put differently, it continues to be in denial dreaming of some agreement by Greece’s major creditors to buy new seven year Greek bonds of their own accord (once the bonds they hold mature). The key words here are “of their own accord”. Why? Because a debt roll over without free volition will cause the rating agencies to declare that Greek debt is in a state of default, thus making it impossible for the ECB to accept it as collateral from banks; which will in turn lead to a cascade of bank defaults which will… Thus, we are now embroiled in a discussion on the definition of ‘free will’ that would delight political philosophers and linguists.
The truth of the matter is that no investor, in their right mind, would choose to roll Greek debt over if they could help it. Which means that if they are allowed to decide freely, only a minuscule amount of debt will be rolled over; thus rendering the whole exercise pointless. The alternative is to give them ‘incentives’ to buy new Greek bonds that are akin to the Mafia’s favourite expression “we shall make you an offer you cannot refuse”. Today, it seems, politicians, the ECB and credit rating company Fitch have stitched up a two-part deal: (a) Creditors will be ‘leaned upon’ to roll over, and (b) Fitch will downgrade Greece to ‘restricted default’ but keep Greek bonds at CCC! In this manner, the ECB can continue to pretend that it accepts Greek bonds as collateral, the French government can claim that they avoided a default, and Berlin can celebrate its success in making some creditors pick up part of the bill.
If the above smacks of desperation it is because it is one last desperate bid to deny reality. Everyone knows that the time will come soon when linguistic games will no longer hold sway over the menacing facts. And when the rating agencies give the green light for the cashing of CDSs taken out against the Greek debt, Europe’s banks will come crashing down (courtesy of all the CDSs issued by their subsidiaries, and which the banks will have to cover for, repeating the sad rituals of AIG after Lehman’s).

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