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Wednesday 13 July 2011

Beware The Athenian Haircut – Progress Report

Amid yet more assertions that the Euro is dead, the currency continues to trade at more than respectable levels (at 1630 hours today, one Pound Sterling bought less in Euro – a cent and a half less – than last November, for instance). But that level of market confidence can only be maintained if the debt problems in Greece and other Eurozone nations are managed in an organised way.

As I noted at the beginning of the month, there was already a move to roll over Greek debt held by German and French banks. But even that was not going to be enough, and some lower down the investors’ food chain were always going to have to take a haircut. And so it has turned out: Germany is leading calls for funds from the Euro bailout fund to be used to buy back some of that Greek debt.

However, and if you’re at the end of that food chain with a holding of Greek debt, it’s a very big however, the buying back of that debt would be “at a discount”, which means, as I’ve said more than once, that some investors are going to have to take less than a hundred cents on the Euro. But, like those in California, they will at least be able to get some tangible return – like now – on their investment.

Once the dust had settled, this would mean that the Greek Government would be facing far lower debt levels, and a kinder repayment schedule, thus giving time for reforms to work their way through the system, together with a little contingency margin. But it would also mean that Greece had effectively defaulted. And it would not stop the contagion spreading to other Eurozone economies.

Which brings us back to the European Central Bank (ECB) and the Eurozone finance ministers, who have done an awful lot of negotiation, but may not be moving quickly enough. That has to change: the markets are not only looking at Ireland and Portugal, those other countries that have had bailouts, but also at Italy and Spain.

There has to be both speed and discipline, and the idea that we in the UK can just sit on the sidelines and remain unaffected should be put firmly to one side: we cannot. And, equally, we cannot ignore the potentially lethal game of chicken being played out on the Hill over the US debt ceiling.

If one or other of these games goes wrong, there is no direction home. I’ll keep checking back on both Eurozone and USA.

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