Greece is slowly sliding toward the inevitable. Namely a big, meaty haircut for bondholders. Of course, the banks and financiers will not take losses lying down. They will demand asset sales and higher taxes. Greece will suffer for a while.
Fitch today said Greece has entered “selective default” due to the private sector involvement in the latest kick-the-can schemery. These short-term fixes will be attempted, even though they seem destined to fail.
Greece must get out from under its enormous debt load to have any chance at real growth in the next decade. When these half measures and schemes do fail, how big of a hit will bondholders need to take?
We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first followed by a larger one at a later date. To give Greece a fighting chance they probably need a write down close to 65%.
An eventual agreement on debt haircuts will only be one part of a wider agreement and reform efforts, of course. But it will be crucial in order to get the people and unions to agree. Banks and other entities who own the bonds will simply have to take losses. It will be ugly, with insurance companies and all sorts of firms caught up in the financial chaos. But it’s going to happen, and the sooner it does, the sooner Southern Europe can return to real growth.