Beware The Athenian Haircut – Revisited

Last month, I looked at the worsening situation with the Greek economy and concluded that, apart from my observations on the frequently execrable press coverage of events, Greece would impose a haircut on some of those lower down the lenders’ food chain.

And after looking earlier today at what happened in California, where some state debt was written down in addition to an implicit lengthening of payment schedules, I concluded that a single currency area would not necessarily find itself in trouble, were the haircut to be imposed.

The prospect of some kind of arrangement whereby some creditors have to concede that they will get less than 100 cents on the euro, together with longer payment terms and/or rolling over of credit – however this is expressed – is imminent: Greece is more or less insolvent without some kind of agreement to extend a further line of credit.

That credit would not necessarily be lent in vain: the Greek Government needs to get its better off citizens to pay their taxes and a programme of asset sales is on the cards. Getting some time to do the reorganising and restructuring would provide an opportunity to make coherent reforms and also prevent that release of assets from becoming a fire sale.

So who is on the hook for Greek debt? The lions’ share is around 90 billion Dollars’ worth held by France and Germany. But some in the UK might be surprised to learn that we are in third place with a further 14.6 billion Dollars at stake, with the USA next in line with 7.3 billion. It is in these countries that the banks are viewing the prospect of having to take a haircut and rollover in one.

And thereby hang two further problems. First is the potential of a haircut to destabilise smaller banks, especially in Germany. Then there is the clear corollary: if Greece does it, can Ireland and Portugal be far behind? Thus the need for everything to happen in a disciplined manner: this was characterised yesterday evening by an unusually relaxed Robert Peston as “orderly reconstruction”.

As to all those screaming that the Euro is somehow finished, I would advise caution, and a look at the foreign exchanges: right now (1815 hours), one Pound Sterling buys just 1.127 Euro, rather less than the 1.15 of last November and 1.14 of late April. So the idea that this single currency is collapsing is total drivel.

But that doesn’t mean the current hiatus is over, or will be easily resolved. I’ll no doubt return to this later.