More and more this feels like an arranged marriage. The guests have arrived, the band is playing, the feast has been prepared, and the father of the bride is coaxing the reluctant bride up the aisle whispering that it might not turn out as bad as she fears.
There is a lot of noise coming out of various governments today regarding Greece. Again. It also seems that the street is firing up the printing presses, coming out with reports all showing how dire it would be for the rest of Europe if Greece defaults. Over and over I hear and read that Greece will be bailed out because it will be bad for Germany and France in particular if Greece defaults. No one seems to ask anymore whether a Greek default is good or bad for Greece. That seems to be irrelevant. What matters is that it's bad for the rest of Europe so they will do their duty and accept the bailout, whether they want to or not. I have never truly understood arranged marriages, so I guess it makes sense that I don't understand this. I continue to believe that:
1) Greece should not collateralize its debt under any circumstances (some of their bonds actually have some protection against this)
2) 2) Greece could default and restructure in a way that has minimal impact on the debt holders it cares most about (its citizens, pension fund, and banks)
3) Greece would be better off defaulting now, and moving ahead on its long term solution
Earlier today I went through some Goldman research. In summary they argue that a default is not a good outcome for the other nations and it creates a domino effect. A default is rarely the best outcome for the lenders, but it happens. Avoiding default because it hurts the lenders too much does not seem like a good reason for Greece to avoid default, but I feel like I'm swimming against the current on this one. One reason that GS used to demonstrate that now was not the time to default, that I found particularly interesting, was that Greece wasn't certain of the level of sustainable debt. Hmmm. So Greece should continue to make payments on its existing high level of debt until it can truly determine what is sustainable? Talk about throwing good money after bad. The reality is that for at least the last 4 years no one has had a clue what the sustainable debt level for Greece was or would be.
Then CNBC did a special on why Greece wouldn't default. CNBC used a lot of information from a JPM report, but again, the conclusion was the same. Germany and France would be too negatively affected by any default to let a default occur. If Greece was silly enough to default, then Ireland might also default. That would also be inconvenient, to say the least. So the only obvious conclusion is that Greece won't default because it would hurt Germany and France too much and would push Ireland over the edge. Again, no real discussion on why it would hurt Greece to default, but I guess that is unimportant as Greece is expected to do what it is told.
The report also tried to quantify the ECB exposure. According to the report, the ECB paid about 80 cents on the dollar for 72 billion of Greek debt in open market purchase operations. They must have a mark to market loss on that position, though depending on the maturity of their purchases it may be small. But this is outright exposure the ECB has. Can the ECB afford to lose this money? They have also lent 207 billion to Greek banks versus holding 130 billion of collateral. If a restructuring wipes out the Greek banks, what would the loss on these loans be? Again, is the ECB set up at all to have these losses? Since the ECB has behaved as though the situation in Greece was always a liquidity problem I suspect that no real serious thought was put into the impact of actual losses. What would be the ramifications of the ECB losing money on these positions? I assume the member countries would have to put money into the ECB. What would the credibility of the ECB once it lost 50 billion? I assume it would be incredibly low. Who would trust anything the ECB says or does? Would you have faith in their ability to manage money supply? interest rates? I suspect that in the end, this is the real reason we will get to witness another royal wedding. The ECB cannot afford under any circumstances to have been so wrong. The ECB, more than German or French banks, cannot deal with the losses - neither economically, nor politically. This is likely the deep dark reason Greece will be brought to the altar, however reluctantly, to accept another round of kick the can down the road money.
I remain convinced that Greece would be best served by restructuring. It can do it in a way that creates minimal current damage to itself while letting it truly focus on plans for the future. In the end, I am becoming dismayed that the lenders are too scared to let them default, so they won't. The problem will not go away, it will just get pushed into the future so we can continue to have a market that is moved by the whims of government rather than true market forces.