Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24
THE GLOBAL WARMING CLIMATE CHANGE MEGA-TREND IS THE INFLATION MEGA-TREND! - 3rd May 24
Banxe Reviews: Revolutionising Financial Transactions with Innovative Solutions - 3rd May 24
MRNA - The beginning of the end of cancer? - 3rd May 24
The Future of Gaming: What's Coming Next? - 3rd May 24
What is A Split Capital Investment Trust? - 3rd May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Central Banks Beat Up on Private Creditors

Interest-Rates / Eurozone Debt Crisis Mar 13, 2012 - 01:42 PM GMT

By: John_Browne

Interest-Rates

Last week the Greek government, with the heavy handed support of its larger friends in the Eurozone, succeeded in coercing some 85.8 percent of private sector bondholders to "voluntarily" exchange €206 billion-worth of Greek sovereign bonds for newer bonds with longer maturities, lower coupon rates, and a face value of 53.5 percent less than the original paper. The benignly termed "haircut" (more accurately described as a "scalping") is particularly painful for those buyers who were literally strong armed by their own governments into buying Greek bonds in the hopes of achieving regional financial stability.


A monstrous creation of political expediency, the deal may have solved Greece's short-term funding of some $19 billion in bonds due on March 20th, and secured the likelihood of its receipt of an additional $170 billion package bailout. While it is still far too early to tell if the agreement does anything beyond kicking the can down the road a few paces, the immediate lessons are easier to grasp. Most strikingly, this episode reveals just how cheaply the rights of private bondholders will be held in the new world of sovereign bailouts.

One particularly pernicious aspect of the settlement was the declaration that the European Central Bank (ECB) deemed itself to be 'senior' to all other bondholders and was thusly able to recoup all its invested principal. This unilateral action should justifiably shock traditional private bond buyers worldwide. Previously, such draconian and politically self-seeking actions would have been the purview of revolutionary tyrannies, not the modus operandi of staid Continental bankers.

Equally troubling was the underhanded manner in which the Greek government used collective action clauses to pressure bondholders to accept a 'voluntary' swap. Using these legal devices, even those who had said "no" were declared retroactively to have said "yes." In this manner, more than 90% of bondholders are now on board. The Soviets could not run a better election.

At the last hour, the whole messy deal was deemed a 'credit event' by the International Swaps and Derivatives Association thereby triggering payments of so-called credit default swaps (CDS). Interestingly, investors only learned of these modest reimbursements after the deal was finalized. This delayed decision could fuel suspicions that the action was deliberately timed to bring pressure on bondholders to accept the Greek government swap offer.

These three official actions likely will erode confidence quietly and will create extensive long-term damage to the image of government bonds as a riskless asset class. Coming at a time of recession and increased government spending, it could herald acute funding difficulties for less creditworthy nations. It may also scare some private buyers away from the highest rated sovereign debt, leaving central bankers as the increasingly dominant market maker. An analysis of this problem can be found in the latest issue of Euro Pacific's newsletter.

Forgetting the lessons of the pre-Bretton Woods era, many institutional investors had been lulled into the fond belief that in the modern world governments of politically important developed nations would not default. This belief had allowed many nations to borrow massively even as they failed to address fiscal imbalances. The Greek default should shatter this belief.

At its core, this deal was a means to protect the financial status quo. And from my perspective the biggest losers, worse off even than the private bondholders, are Greek citizens who must live under the weight of a crushing austerity imposed upon them from without. It would have been far better for the rank and file Greeks if their government had been allowed to default the old fashioned way, and all lenders, public and private would have been made to pay, in full, for their ill-advised loans. In so doing, a newly impoverished Greece would have at least a real chance for a fresh start.

The unemployment rate among young Greeks is some 51 percent. Unless the situation reverses itself quickly and decisively, Greece may never be able to repay even a much reduced debt burden. In the meantime, the Greek people will be subject to inescapable poverty. But it need not happen. Some four years ago, Iceland put ECB austerity proposals to a referendum. The people voted for default. Now it appears as if Iceland is on the road to recovery. Last month, S&P raised Iceland's credit rating, illustrating what may happen if free markets are allowed to function. Greece may be an example of the dangers of best laid plans.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday.

Are you a serious investor? Then don't miss hard-hitting, original analysis in every issue of Euro Pacific Capital's Global Investor newsletter. Click here for more information.

For a great primer on economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes.

By John Browne
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

John_Browne Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in