GREECE (6)

Greece's rescue package required private holders of Greek Government bonds to "voluntarily" accept a haircut of more than 50% on the face value of their bonds, and a lower coupon. In the end, they did. Greece needed a two thirds acceptance for bonds issued under Greek law, following which they could force the remainder to accept the revised terms. A small minority held out, but they will now be ignored. The effect is to reduce Greece's oustanding debt of roughly Euros 350 billion by about Euros 100 billion. Together with the restructuring measures forced upon them by their fellow Euro members, Greece is supposedly now able to haul itself out of the abyss into which it had fallen.

Three things are noteworthy in this, I think. First, Greece has avoided leaving the Euro. I have always felt that this was unlikely, not because Greece doesn't want to, but because Germany doesn't want it to. So far, this hunch is being proved right.

Secondly, because some private bondholders held out against the restructuring, it couldn't be classed as voluntary. As such, it triggered a credit event, following which holders of credit default swap insurance will be paid out to cover their losses. The requirement for a voluntary restructuring was supposedly triggered by fear (nay, panic) amongst policymakers about the prospect of huge CDS payouts. However, the markets appear to have taken the news with a shrug. Which suggests in turn that it is unwise to rely too heavily on doomsday predictions of what markets will or won't do in a specific situation.

Thirdly, however, although the restructuring and payment of CDS contracts did not precipitate a crisis, the process of saving Greece will inevitably mean that the make-up of Greece's creditors changes. It is estimated that in 2011, the European Central Bank, IMF and other E.U. Member States held roughly a third of Greece's debt, private investors the rest (though some of those private creditors are in fact state-owned banks). After the restructuring, those proportions will have reversed; furthermore, by 2015, after the new rescue package is fully implemented, it is likely to be 85:15. In other words, what we are seeing is a further transfer of financial risk from the private sector to the public sector (i.e. taxpayers). The big questions for all rich countries is whether taxpayers are willing to continue to accept that risk transfer.

Walter Blotscher