A Greek Haircut - Too Much off the Top?
If the Greeks push too hard for a cut above 50%, we’ll be looking at the first exit from the Euro and a clear sovereign default.
It’s simple math: 50% is not enough to save the Greek economy and a cut over 50% means the private lenders will not buy in. WSJ posits that “the real question is not whether Greece will reach a voluntary agreement with its creditors, but by how much the deal will ease its debt burden”. I disagree. The interest isn’t there for all the private lenders to agree. Too much cutting, combined with lenders having CDS insurance means there is little incentive to agree to a further cut above the agreed 50%. The IMF and the EU might want more, and can push and prod, but if the money does not add up, the private lenders (a varied bunch with differing interests) won’t agree and the Greeks are left with little choice but to drag back the Drachma. ISDA is another key player, as it holds the power to declare a credit event. An unprecedented power for a non-governmental organization.
It’s not a time to buy the Euro, except maybe against the Yen since it can’t go much further down, or so it’s thought…