By Marshall Auerback, a portfolio strategist and hedge fund manager
News stories continue to suggest that Greece once again appears on the verge of reaching a deal with its private sector creditors on how much of a loss they would be willing to accept on their bond holdings. The latest numbers suggest a 70% write-down. A pretty striking comedown for what is supposed to be a “voluntary default” and, hence, not subject to the triggers of a credit default swap on Greek debt.
Naturally, the spin surrounding the proposed agreement is that this is a “one-off” and that other troubled periphery nations shouldn’t even begin to think of securing a comparable deal. But the inherent tension between securing a write-down on Greek debt which more closely mirrors the disaster which is now the Greek economy, and the desire to minimise the potential contagion effect is rearing its ugly head already, and may help to explain some of Germany’s recent machinations.
Peter Spiegel of the Financial Times published the German government’s proposal for Greece’s “improvement of compliance” with the terms of the bailout, and all of a sudden Greek PSI positively pales in comparison. According to Germany’s proposal, whatever the result of the PSI deal, Greece would need to “legally commit itself to giving absolute priority to future debt service” and “accept shifting budgetary sovereignty to the European level”. If the Greek government is not willing to do this, the troika would presumably turn off the taps of bailout money and Greece would default. With no access to market or official financing, Greece would be forced to exit the eurozone.