Monday, July 20, 2015

The Euro, From Cash to Kesh

Ruling out any writeoff of Greece’s debts, Angela Merkel is quoted today as saying “A classic haircut of 30, 40 percent of debt cannot happen in a currency union....”  This echoes what Wolfgang Schäuble said last week: “....everyone knows that a debt haircut is incompatible with membership in the monetary union.”

OK, let’s take a moment with this.  The United States is a currency union: fifty states with all their urban and regional subdivisions share a common currency, the US dollar.  Are public debts of these subjurisdictions ever written down?  Regularly.  Orange County, anyone?  Detroit?  What law of nature or human affairs is supposed to make this impossible?

As a general proposition, the Merkel-Schäuble doctrine is obviously, indefensibly wrong.  You’d think someone would call them on it.

So maybe the no-haircut rule is wrong in general but does apply to the eurozone.  You could argue that writing down Greek debt reduces Germany’s assets as it decreases Greece’s liabilities and therefore constitutes the sort of transfer that the zone was carefully crafted to avoid.  The problem is that this overlooks the fact that Greek debt is already worth less because the markets have correctly divined that it cannot be fully repaid.  This is clear if you think of the mechanism by which a writedown would normally be executed: the existing stock of debt (or the portion of it drawn on a particular creditor) would be exchanged for a new bundle of instruments with lower face value but approximately the same market value.  Such a transaction acknowledges and ratifies a loss in creditor value that has already occurred.  Now, if you want to interpret the EU rules as forbidding the market to devalue the assets of creditors and the liabilities of borrowers because that constitutes a transfer—well, good luck.

So on closer analysis the German position is as absurd as it looks on the surface.  It is a weak play for intellectual legitimacy.  What it’s really about, of course, is the fact that Greek maturities are spread out over the coming decades, and that restructuring their terms will postpone the reality of default to future politicians.  A writedown is immediate and pins the loss on the folks currently in control.  And you can’t have that in a currency union, can you?

4 comments: said...

If in fact Germany had good intentions, which they have pretty clearly shown that they do not, the way to slice this would have been to have restructured the debt to make it longer term, thus reducing the payments. One could then have one's cake and eat it too, no official haircut or writedown of what is owed, but a lower payment due to a major stretching out of when it is due. This has been done in many cases, and it was what I thought they would do during the spring, but obviously did not, with Schauble taking his super hard line and holding it from Day One.

Les Baker said...

And then it came to me ....

Greek bonds that can't be written down should have their interest rates reduced to negative rates, like home mortgages in Denmark and bank accounts in Spain. Bondholders ought to be paying for the privilege of tying up their money in bonds that can't be written down.

john c. halasz said...

Yes, I haven't seen an analysis of what the numbers look like, but the debt has already been written down in NPV by over half through term stretch out and interest reductions, such that further reductions likely would require not just absurdly long stretch outs, but actual negative rates to reach an adequate NPV reduction. This amounts to a dispute over an arbitrary accounting fiction in the German interpretation of EZ rules.

Myrtle Blackwood said...

What's the real agenda? Privatisation of public assets in return for some debt write-down? How to acquire a Greek island (or two or three...).

What happened to the self-regulating market? If a business person lends money to someone who can't pay it back the 'market' was supposed to write-off the entrepreneur.

The banks, as Alan Greenspan writes, accepted an historically high tolerance to risk. A risk "at the outer limits of human tolerance."

The logical solution is the public acquisition of private assets.