Central banks have, to save just a few billion, broken one of the cardinal rules of the bond markets in the Greek bailout. We can see why they did it but to destroy something to save it was an excuse last used in the Vietnam War.
The Greek bailout, or the default and bailout of the official lenders if we are to be more accurate, probably won't solve the problem anyway. It's too mean, leaves Greece still with a shockingly high and unsustainable debt burden and does pretty much Sweet FA to aid either the Greek people or the Greek economy. It isn't, therefore, all that much of a solution to anything.
In the process of composing it we've also seen the near demise of democracy in the country: it is quite seriously being suggested that the imminent elections should be postponed as a condition of the bailout itself. Greece itself, the Greek economy, won't even get any of the money from the bailout. It is to be reserved to pay those debts which still exist, not to do anything so sensible as aid an economy and people in freefall.
But for the long term perhaps the most important point is that in crafting this agreement the central banks of Europe have broken, for the first time, one of the cardinal rules of bond issuance: that all bond holders, all holding the same issue, are to be treated the same.
"Euro-area central banks will swap the Greek bonds in their investment portfolios for similar securities to avoid enforced losses during a debt restructuring, a euro-area official said.
The swap will happen today and is identical to one the European Central Bank carried out last week with the Greek bonds acquired in its asset-purchase program, the official said. The new Greek bonds will be immune to collective action clauses, or CACs, ensuring central banks don’t incur any losses when a private-sector debt write-down takes place, the official said on condition of anonymity. A spokesman for the Frankfurt-based ECB declined to comment."
The point here is that if you buy into a bond issue, say, Greece 2015 5%, then you are going to be treated at all times just like anyone else who has bought into that bond issue. If interest is late then it's late for all. If there's a default there's a default for all. If there's early repayment then there's early repayment at least on offer to all. And the point of this system is that this encourages people to invest in bonds. They know that political favouritism, to give just one example, isn't going to affect repayment of the bonds. With a company, the company cannot make sure that the bonds held by the CEO's friends are paid off before everyone else's...indeed, the CEO would go to jail in such an instance. Similarly, a government cannot, again just as an example, say they're not going to pay those nasty foreigners but they will pay local residents. This encourages foreigners to invest in such bonds: for the obvious point for a government would be to threaten this just before an election and thus get the votes of those local who have votes. At the expense of the foreigners who do not.
But as you can see, the central banks of Europe have decided to violate this basic principle of the bond markets. They are getting to change their bonds into new ones before the haircut is applied to all of the other bonds. Before the 53% face value losses, before the actual 70% losses in real value. And why are they doing this?
"The value of Greek bonds held by euro-area central banks other than Greece in their investment portfolios is less than 10 billion euros,"
For a pittance, for a miserably small amount of money. They're wiling to rip up the rules of the game for perhaps 5 billion. Sure, that's real money but in the context of European economies, of the debt crisis, this is nothing, more like a rounding error. But to save this trifling sum they have ripped up the contracts under which the debt was originally issued and made everyone, everywhere, more wary of investing in European sovereign bond issues.
The decision to ignore law, common practice and standard contracts is going to cost the governments, and thus the taxpayers, orf Europe a lot more in coming years than the pittance that was saved by this deceit.
Image by Dennis Jarvis. Used under creative commons license.
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