50% debt cut for Greece?

October 31, 2011

Reading German newspapers theses days, one of the most prominent headline reads “50% debt cut for Greece settled.” The headline refers to the latest meeting of the EU member head of states, who supposedly settled for a 50% debt relief for Greece and most notably with “substantial participation” of the private banking sector holding Greek government bonds. Why then did stock prices of these institutions surge upwards shortly after the 50% cut publication? 

Here’s why:

What was settled for is by no means a real 50% debt cut and was even less settled with the “substantial participation of the private banking sector.” The truth is, the private sector was invited to negotiate trading “toxic” Greek bonds for “healthy” governmental bonds of other EU members. The 50% mentioned in the press stems from the proposition to have the private sector amortize 50% of the value of the traded bonds during the trade.  

The crux of the matter lies in the details: the negotiations are talking about the nominal, not the depreciated accounting or even market value from which 50% is supposed to be amortized. Here is an easy analogy to help understand what is going on: 

Imagine you are a bank and you hold governmental bonds with the nominal value of 100€. But these bonds are currently traded for 30€ , which means if sold on the market you’d have to amortize 70% of it. But now you’re offered to trade your bonds for 50% nominal value. You use your basic math skills and find out that 50% nominal value translate to 50€ – or in other words 20€ more than you would’ve gotten on the market!  I bet you’ll readily agree to this “significant” contribution of your bank to solve the Greek debt crisis. 

Basically the “debt-cut” settled for is a huge monetary gift to the banks, while it is celebrated as a major break-through in forcing the private sector into contribution. What the newspapers should write is the following: “tax-payers will compensate difference between the market-value and 50% nominal value for banking sector.” The public has been ripped of and deceived again. 

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