On February 31, 2012, after seemingly endless negotiations with creditors, all international holders of sovereign Greek debt will announce unanimously that they will forgive Greece 100% of her sovereign debt. Their official rationale will be: "If we keep spending all our energies on 3% of the Eurozone's GDP (without really accomplishing anything), we will neglect the other 97% of the GDP and the cost of that will be much higher than forgiving Greece all her sovereign debt now".
This means that the central government of Greece will no longer have any foreign debt. The domestic debt of the central government remains unaffected by this. Consequently, Greek banks, pension funds, insurance companies, etc. can remain hopeful that their loans to the central government will be paid.
Some time during March 2012, Greece will discover that things haven't really changed that much. Even though the government now has to pay much less interest than before, it still requires new financing in order to pay all the bills. They cannot raise this new financing in international markets because part of the 100% haircut deal was that Greece would no longer request financing in international markets until the country had regained creditworthiness.
At the same time, the banking sector begins having severe liquidity problems. Part of the 100% haircut deal was that the ECB insisted on freezing its lending to the Greek banking sector. They would not cancel their outstanding loans but neither would they extend new loans.
The banking sector loses well over 1 BN EUR per month in liquidity because import payments exceed foreign revenues from exports and services by that amount. Also, capital flight continues draining the banking system of another 1 BN EUR per month (or more!).
With new capital inflow from abroad to finance these deficits having come to a halt, the government has no choice but to take dramatic actions: imports taxes and capital controls are implemented and the government issues a new bond whose purchase is mandatory for all domestic savers. This bond serves to finance the continued budget deficit and to provide liquidity to the banking system.
This means that the central government of Greece will no longer have any foreign debt. The domestic debt of the central government remains unaffected by this. Consequently, Greek banks, pension funds, insurance companies, etc. can remain hopeful that their loans to the central government will be paid.
Some time during March 2012, Greece will discover that things haven't really changed that much. Even though the government now has to pay much less interest than before, it still requires new financing in order to pay all the bills. They cannot raise this new financing in international markets because part of the 100% haircut deal was that Greece would no longer request financing in international markets until the country had regained creditworthiness.
At the same time, the banking sector begins having severe liquidity problems. Part of the 100% haircut deal was that the ECB insisted on freezing its lending to the Greek banking sector. They would not cancel their outstanding loans but neither would they extend new loans.
The banking sector loses well over 1 BN EUR per month in liquidity because import payments exceed foreign revenues from exports and services by that amount. Also, capital flight continues draining the banking system of another 1 BN EUR per month (or more!).
With new capital inflow from abroad to finance these deficits having come to a halt, the government has no choice but to take dramatic actions: imports taxes and capital controls are implemented and the government issues a new bond whose purchase is mandatory for all domestic savers. This bond serves to finance the continued budget deficit and to provide liquidity to the banking system.
febuary has 29 days this year..not to mention that it would normally be 28..so....31st??
ReplyDeleteWell, I used that date to signal that this was a satire...
ReplyDelete