Again, the sector that will lose the most is the banks. A problem will arise when additional economies like Spain, Italy, and Ireland, will need debt relief also. Therefore, European governments and private creditors will have to foot the bill.īecause Greece is not a big economy, there wont be any implications for the markets if additional debt is written down. One thing is for sure, the IMF wont take a loss, for that will create a bad precedent. Who will take this loss is not sure at this time. In order for Greece to have a chance at sustainability, it needs at least (bare minimum)100 billion euros in additional write-downs. Remember, there are still about 100 billion euros of Greek debt in the hands of the market. Just because the official sector has to take a hit, does not mean that private creditors wont take an additional hit also. However, there are more things to consider here. Therefore, the official sector will have to take a hit. So what ever happens, no one wants to kick Greece out. Besides the fact that German elections are near, how are leaders going to explain to their taxpayers that they have to take a loss? But as Wolfgang Schaueble has said and so have I, Germany has more to lose from a euro break-up than anyone else. The problem of course is that Germany is budging. Therefore, it is now pushing for other official Greek creditors to take a haircut. How the IFM figured that Greece's debt was sustainable in the first place is a another question, but putting that aside, today it understands that Greek debt is not sustainable. Those bylaws call for loans to be made only to countries that are deemed solvent and pass debt sustainability tests. Besides the fact that its budget is stretched, it cannot go against its own bylaws. The only question was, who will take the lose? The answer is the troika.Īs reported by Reuters yesterday, the IMF has had enough and does not want to give any more money to the Greek project. So all of a sudden, it woke up to reality and realize that additional debt relief was warranted. Nor did anyone realize that Greece would experience a Great Depression like GDP contraction and unemployment. No one for example imagined that the Greek economy would contract by 7% in 2012 alone. See, the Greek economy contracted more than it should have and obviously the sustainability models did not compute. I mean, the modules were correct, but no one told that to the Greek economy. To make a long story short, it finally figured out why the models did not work. So year after year, the figures were way off and Greek debt sustainability never happened. Economic contraction was always 2-3 times higher than what the projected models called for. Also something else happened, the projections for the Greek economy were way off. Greece's debt was still about 140% of GDP with no primary surplus in sight. About 100 billion euros of debt was wiped clean from Greece's books.īut even after this, there was still a problem. So the troika orchestrated (meaning a lot of political arm-twisting toward the banks) the biggest orderly debt relief program the world had ever seen. So it decided that indeed Greek debt was not sustainable and in order for the troika to get its money back, someone had to take a loss. But the troika was not worried, for its models told it that Greece would once again be sustainable, and at some point in the future, it would get its money back.īut then a funny thing happened. The banks got top euro for their bonds, compared with what they would have gotten in the secondary market. So it rolled over about 180 billion euros in Greek debt and gave the market (European banks) a break. So in order for this not to happen, it decided to roll over Greece's debt, until such time that Greece would be able to return to the markets and the troika could get the money back.
So it laid out a plan, whereby Greece would be put on the path to growth and sustainability, as long as it did not default on its debt. So this troika looked at the Greek situation and decided that Greece would be able to make it, just as long as it got some help from its friends. Never before had the world seen such an international consortium of such financial fire power like this. Actually it was the first time something like this ever happen.
So when the markets asked a very high yield from Greece, the European Union, the IMF and the ECB teamed up to save the day, in what today is called the troika. For some odd reason however, everybody thought nothing would happen, because until that time, nothing indeed had happened. Spreads were already rising for some time and worries about the Greek economy were already a daily topic of conversation as early as 2008. When the Greek problem became apparent around 2010, it was already too late.
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