Tuesday, October 2, 2012

ECB is tangled in its own logic on Greece

by James Mackintosh

Financial Times
October 2, 2012

Greek finances are so bad that the “budget” is a misnomer. Still, the finance minister this week forecast a sixth year in a row of recession, longer than the drop in US output during the Great Depression.

As the economy contracts, its debt is predicted to grow to 179.3 per cent of gross domestic product next year.

This is clearly unsustainable. Yet, Greece is in a bind. It has five groups of creditors and will find it hard to default on any of them. At least two, the European Central Bank and other eurozone governments, must be forced into a debt restructuring if Greece is to stay in the euro.

Take the creditors in order. Greece wiped out four-fifths of private sector debt in March. Defaulting again on the €60bn or so of new bonds would be legally tough as they are governed by English law, not the old bonds’ Greek law.

Private bondholders are gaining confidence that the pain of inevitable default will fall on others, with the new bonds’ yields close to where they first traded in March. The 10-year yield of 19.2 per cent is down from more than 30 per cent in May.

The International Monetary Fund’s €22bn of loans are unassailable. It is always paid.


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