Greece’s creditor banks broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds, increasing the risk of the euro-area’s first sovereign default.
Proposals by a committee representing financial firms haven’t produced a “constructive consolidated response by all parties,” the Washington-based Institute of International Finance said in a statement yesterday. Talks with Greece and the official sector are “paused for reflection on the benefits of a voluntary approach,” the group said.
Aha. The Greeks have figured out that when you owe someone money and borrowed it unsecured, as is always true for sovereigns, you have the trump hand. The only real “price” to be paid by telling your creditors to piss off is that you won’t be able to borrow again in the future.
This is a material price, but it is not the end of the world. It means you have to balance your budget immediately, but that’s good — not bad.
Of course everyone is freaking out about triggering Credit Default Swaps and similar instruments. That’s misplaced — there simply isn’t that much outstanding for Greece in that regard.
No, the real contagion risk is not Greece. It is that once Greece does this, and the world does not immediately end, then other nations (hint: Italy?) may come to the conclusion that they too should tell creditors to stick it where the sun does not shine.
They’re right, incidentally. The utter and complete fraud in our banking structures that allow institutions to hold these sorts of debts as “risk free”, requiring no reserves and no capital behind them, is an outrage. It is systemic and intentional fraud perpetrated upon the world for the sole benefit of making possible national overspending with impunity, destroying any sort of market discipline aimed at budgetary deficits.
Well, Basel, you’re about to “get yours.”
Not today, not tomorrow, but once the standard is set you can take to the bank that other nations will consider the same action — as well they should — and then the folly of so-called “regulators” who put together this outrage will become apparent.
Welcome to the 1930s — uh, I mean, the 2010s…..