Tuesday, April 26, 2011

Greece Haircut for Bondholders Already Overdue

by Matthew Lynn


April 26, 2011

No cakes, party games or music. As Greece last weekend marked the passing of the first year since it was forced to seek a bailout from its fellow euro members, the mood could hardly have been more somber.

Bond yields soared to fresh highs. The cost of insuring against a Greek default rose to a record. The finance ministry started a criminal investigation into bank employees spreading rumors of an imminent restructuring.

In fact, Greece should have celebrated the anniversary of the rescue package in a different way -- by announcing it was repudiating some of its debts.

The sooner Greece imposes a haircut, to use the financial market’s term for losses incurred in a default, the better it will be for everyone. Delay leads to bigger haircuts, and economic research suggests the bigger the haircut, the worse the pain that follows. The damage being inflicted on the Greek economy is too great. And once defaults within the euro area are accepted, a sensible conversation about how to fix the single currency can begin.

Over the last week, the prices in the market make it clear that most traders have already concluded that a Greek default is a done deal. The yield on two-year Greek debt rose higher than 22 percent at the end of last week. Only the most sharkish credit company charges those kinds of rates. Ten-year bond yields are now close to 15 percent. The cost of insuring Greek sovereign debt jumped to a record, with the prices of credit- default swaps now suggesting there is a 67 percent chance of default.


See also the paper by Juan Cruces and Christoph Trebesch, "Sovereign Defaults: The Price of Haircuts"

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