Friday, October 28, 2011

A Greek default in all but name

by Robert J. Samuelson

Washington Post

October 28, 2011

There’s an Orwellian quality to Europe’s latest financial rescue. Words lose their ordinary meaning. Greece, for example, has clearly defaulted, but no one says so. In July, private lenders agreed “voluntarily” to accept an estimated 21 percent reduction in their loans to Greece. Now that’s been pushed to 50 percent, and private lenders’ consent is still described as “voluntary.” Well, it’s about as “voluntary as when one hands over one’s wallet in response to the choice of, ‘Your money or your life,’ ” notes Douglas Elliott of the Brookings Institution.

What constitutes a default? Here is Standard & Poor’s definition: “We generally define a sovereign default as the failure to meet [the] interest or principal payments . . . contained in the original terms of the rated obligation.” Not much doubt there: A 50 percent “haircut” wasn’t part of the original bonds. But for political and legal reasons, it’s inconvenient to declare a default. Instead, the Europeans call the write-down “private-sector involvement,” or PSI. How reassuring.

Europe’s problem is to prevent Greece’s fate from befalling any of the other 16 countries using the euro — most obviously, Ireland, Portugal, Spain and Italy, but also Belgium and France. If investors believe that default (or PSI) is unavoidable, they will desert the debts of these countries. A financial implosion could become unavoidable. Markets would dump government bonds, sending their interest rates soaring. European banks — big investors in government bonds — would suffer huge losses that might trigger a panic.


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