Europe’s Plan Won’t Cut Greek Debt: Allen, Eichengreen and Evans

http://www.bloomberg.com/news/2011-08-05/europe-s-plan-won-t-cut-greek-debt-allen-eichengreen-and-evans.html

Raw Deal

Obviously, this is a raw deal for Greece. It also is a bad deal for the euro area, whose leaders again failed to contain the crisis. And it is a bad deal for the European taxpayer, who will shoulder all the sacrifices, while the banks make none.

How could things have gone so wrong?

One answer is that none of the participants involved -- the EU, the French and German leaders, the Institute of International Finance -- knew what they were doing. A 21 percent reduction in net present value sounds impressive, but it has no bearing on the amount by which the exchange will reduce Greece’s debt. No one appreciated that 30-year zero-coupon bonds are much more expensive in today’s low-interest-rate environment than they were 20 years ago, in the days of the Brady Plan. No one understood that the debt exchange effectively increased Greece’s annual interest payments once the cost on the debt to purchase the principal collateral was taken into account.

Hit to Lenders

It may be hard to believe that the experts could be so ill- informed. The only other explanation is that the sole purpose of the exercise was to mislead. The banks can claim that they are taking a hit when in reality they can exchange bonds currently trading at hefty discounts for debt whose market value will be half in the form of AAA collateral. German parliamentarians can be told that the private sector was forced to “participate” in the Greek rescue when in fact, even after rescheduling maturities, those lenders will still receive a large fraction of their original interest payments.

This deal should be thrown out. In its place, the EU should create a real debt exchange with real haircuts for the banks and a significant reduction in Greece’s debt stock.

The good news is that there will be an opportunity to change course. Greece’s debt is still unsustainable, and it will have to be restructured again.

SAMEER SAYS

I M TIRED OF REPEATING THE SAME STUFF AGAIN AND AGAIN

EUROPE IS ON THE FOREFRONT OF THIS GREAT DEFLATIONARY COLLAPSE

THE ECB CANT DO ANYTHING

THE PIIGS WILL EVENTUALLY DEFAULT

THE EFSF WILL COLLAPSE UNDER ITS OWN WEIGHT

THEY CANT BAIL OUT ALL OF EUROPE

THE CRISIS WILL FIRST DEVOUR PIIGS AND THEN TURN TOWARDS FRANCE AND GERMANY AND THEN TO UK

THEY WILL NOT BE ABLE TO ESCAPE THE DEVASTATING EFFECTS OF THE COMING DEFLATIONARY DEPRESION

EUROPE IS IN A TRAP AND THE ONLY WAY OUT IS

- LET THE BANKS FAIL

 - STOP PRINTING MONEY

- LET THE BONDHOLDERS TAKE THE HAIRCUT

- RESET THE SYSTEM

- START AGAIN FROM A FRESH PIECE OF PAPER

- LET THE EURO CRASH AND COLLAPSE

 - LET SOME MEMBERS LEAVE THE EURO

- THIS SYSTEM WONT WORK

WE WILL SEE - ONE WAY OR ANOTHER - HOW THIS GETS RESOLVED

I M SURE EUROPEAN POPULATION WILL BE UNDER GREAT FINANCIAL PAIN AND STRESS

THEY HAVE TO STOP LIVING IN DENIAL

ACCEPT YOU HAVE A PROBLEM AND TRY TO SORT IT OUT 

FINALLY

YOU CANT SOLVE A DEBT PROBLEM BUT TAKING ON MORE DEBT