The Other McCain

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French Plan for Greek Crisis Won’t Work

Posted on | July 4, 2011 | 2 Comments

The stock market surged last week after France announced a plan for French banks to roll over some maturing Greek bonds, thus helping avert default. But now credit rating agencies have had a chance to read the fine print on that plan and aren’t liking what they see:

Greece risks being judged in default on its debt obligations if banks are forced to bear part of the pain, Standard & Poor’s said Monday, suggesting that current proposals for rescuing the euro zone’s weakest member may have to be reconsidered.
In particular, a plan proposed by the French government and banks “could require private sector debt restructuring in a form that we would view as an effective default,” S.&P. said in a statement.
The effects of a Greek default would be felt around the world. The country’s debt of €330 billion might not be large enough in itself to set off a renewed financial crisis, but once the precedent of a euro-zone default had been set, investors would likely abandon the debts of other struggling members, including Portugal and Spain.
More worryingly, Western banks, including the giants of Wall Street, have built a tower of credit default swaps — essentially insurance — on the debts of those countries, and the cost of paying up in a default would be huge. . . .

Just keep reading, it gets worse. Europe has managed to kick the can a bit further down the road, delaying the day of reckoning for a few months, but the essential problems of the Euro-zone’s PIIGS (debt-laden Portugal, Italy, Ireland, Greece and Spain) stubbornly remain.

UPDATE: From Adjoran’s comments below:

No, they haven’t really kicked the can down the road.  They are at the point that the most they can manage is to kick the can across the room a bit.  The can ain’t a-goin’ nowhere.
S&P and other agencies warned about this early in the Greek crisis, that any restructuring which involves the creditors eating any loss would constitute a default and the credit rating would be affected.  Even if the rating agencies didn’t, the bond market isn’t stupid, everyone except Obama and Greece understands a line has been crossed.
Even if this deal didn’t cost the ratings devaluation, it isn’t some miracle like the equity markets seem to believe (probably classical wishful thinking added to the inflated “value” of debased currencies).  This deal is only being advertised as carrying Greece through until 2014, but that presumes a lot:  that every economy envisioned in the austerity plan will be fully and immediately implemented, that the large segment of taxes which have been uncollected in Greece for decades will suddenly come into the Treasury, and that nothing else will go wrong at all for the next three years.  They should have asked for a pony, too.

“The bond market isn’t stupid.” Indeed.

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