Sunday, 5 June 2011

Ski-ing and the prospect of Greek default

We're told that Greece - despite this weeks latest bailout - is likely to default on its debts.

So, even if the EU were willing to take on all of Greece’s debts, Greece would be paying more than 10pc of GDP in debt interest. Of course, the EU isn’t going to do anything like that. No plausible market interest rate is going to be less than twice that level. So to repay its debts, Greece would have to be willing, for decades, to devote well above 10pc, perhaps closer to 20pc of GDP simply to paying interest. 

You see, Greece is going to default - the bondholders are going to have to get a haircut. It is it not? Or does the postponing of the inevitable - what nature ordains - reduce the likelihood of that inevitability. Let me explain with a ski-ing metaphor.

When I learned to ski the instructor, in an effort to break my habit of leaning back, explained (in a fabulous French accent that I won't reproduce):

"Ski-ing is controlled falling over. Because of gravity you are going down that hill, what we do is agree with nature that we will fall over but put it off until we get to the bottom. And then we don't need to fall over."

The longer we postpone default, put off Greece's moment of tumble, the less damage that fall will do, the haircuts become number three rather than number one and the lenders - sovereign or private - have time to order their affairs so as to minimise the loss from default. And you never know, the inevitable might not be inevitable?

Mind you the Greeks aren't noted for prowess at winter sports!


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