[NOTE: This post was originally posted on 19 January 2011 but was inexplicably deleted.]
I shall give readers a bit of time to ponder the details of the Greek backdoor restructuring mooted today, and see what you make of it. I'll have a read myself and come back with commentary.
The plan I've seen is clever but ultimately it's another risk-smearing bailout. Bank A owns EUR100 worth of Greek bonds. Greece buys the bonds back from them, at the current market price, with money borrowed from the EFSF. The EFSF borrows against the credit rating of the entire Eurozone, so paying back their rates is way cheaper than paying our original creditors. Our creditors lose money (good) and recognise losses (good) but we don't default, which saves a lot of face all around, and we save loads on interest payments.
The plan also changes the current dynamics of the Euro default situation as our debt was increasingly being soaked up by the ECB. Defaulting on debt to the ECB would be a little tricky, and would make the ECB's intervention massively inflationary. Obviously the new plans are an attempt to allow Greece to default on debt to anyone but the ECB - and hence of course German in origin.
There is a small catch here. The plan assumes that our creditors will sell at the market rate. But with the EFSF firmly established as a buyer of last resort, the market rate will almost immediately become meaningless. Imagine the choice: do you want to sell your bonds nominally worth 100 for 60 and recognise a loss of 40, or hold them, supposedly 'to maturity', recognise no loss whatsoever, and dare the Greece/EFSF combo to pay a better price? You know that the longer you wait, the closer Greece comes to default, and the higher the price the Eurobailout tombola will want to pay you. Sure, some people that need the liquidity but are solvent overall will go for this, hoping to get a reasonable price while the ball is rolling. But most will hold onto their bonds until the EFSF prices them at nearly 100 again. Ergo, this scheme only really works for sure-fire default countries, like Greece, and can't be used to get rid of very much debt - it will leave us with about enough debt for Greece to have a reasonable chance of digging its way out, with sacrifices. Alternatively, the plan works very well if creditors can be compelled to sell their bonds.
Here's a clue for the Eurocrats: you can't win like this. For reasons that I explain here, focusing on making Europe appear stronger through guarantees is no good while it's still the weakest link at the global level. Like characters in an unimaginably bad Final Destination sequel, a good deal of Europe's debt has been singled out for death; moving it around simply forces the pattern to figure out another way for the debt to "die". The only way to beef up the guarantees behind Europe is to rope in others, like Japan, or China, or the US. But they all seem to have way more debt on their books than even the Eurozone. (Yes, America, Japan, and even China have debt-to-GDP ratios approaching or exceeding 100%. Although of course Japan is a very bizarre, special case and the Chinese are very good at hiding their debt.)
Right on cue, our PM has asked his team to stop talking about restructuring, called one of the articles discussing this scenario 'malignant and in bad faith' (that's the German article, not the NYT article. we can't have that or his future job prospects might be damaged) and generally took his cyclist's foot and shoved it deep into his mouth.