Defaulting Greeks would be cause of Irish political storm
EUROPEAN banks holding Greek debt continue to be treated rather kindly by the European authorities.
Despite holding assets of a government that is wholly insolvent, the major European banks are only looking at a worse-case scenario discount (or haircut) on their assets of just 21pc.
This deal is coming under some pressure, but when first agreed a few months ago, the bank's representative body, the Institute of International Finance, must have been amazed that the authorities were prepared to be quite so generous.
Motivating those very same authorities was, of course, the genuine concern that a steeper haircut would simply deplete the capital of the European banks, throwing the responsibility back on to national governments (and their taxpayers) to make up the difference.
But the European authorities are rapidly realising that you cannot have it all -- you cannot radically restructure Greece's balance sheet and at the same time insulate the bondholders holding Greek debt from the spillover effects of such an exercise.
While the clunky phrase "private sector participation" is being used for this exercise, anyone who spends time watching debt negotiations at companies knows this is really a controlled default and a restructuring.
It happens every day in the corporate world, across sectors. But the nature and scale of this restructuring have implications for Ireland, ones which will have to be watched very carefully by Finance Minister Michael Noonan.
Mario Blejer, the man who managed Argentina's central bank in the aftermath of the world's biggest sovereign default, recently summed up what Greece should do over the next few months.
"Greece should default, and default big," he said.
This idea of going "big'' means that an eventual haircut of 50pc on Greek debt is the minimum amount likely to be required of holders of Greek debt. Leaving aside the huge bank losses this will trigger, it would at least represent a substantial amount of debt relief for the Greeks.
The country is on course to owe €372bn by next year, so crudely a debt-relief package of 50pc (if the country remains in the euro, of course) knocks this down to €186bn, with Greece's debt to GDP left standing at a far more manageable 80pc.
Some believe this is still too high to attract market funding and it would still be shy of the requirements of the EU's Stability and Growth Pact. Nevertheless, it would be seen in the political world as a good deal for the Greek economy -- and this will cause Ireland two political problems.
One is that holders of Irish debt may start to price in -- very rapidly -- a similarly sized "big'' haircut on Irish bonds, even though government politicians will stoutly deny that they would ever seek such a Greek-style restructuring.
If that happens, the Government could end up being a very frustrated administration. Just as our deficit gets into single figures and benchmark bond yields drop below 8pc, the markets may ignore all this progress and become obsessed with what kind of potential haircut on Irish bonds might be planned in a post Greek-default world.
But secondly, it causes a wider political problem, one referred to recently by Citi economist Willem Buiter.
It is that the public and opposition politicians (step forward Sinn Fein?) will start to declare that what is good for the Greeks is good for the Irish.
Put simply, if the Greeks can have 50pc of their debts written off by international markets, why not us? That type of political catch cry will gain significant traction next year.
It will make it difficult for the Government to stick to its current austerity programme. It will make it even harder for ministers to continue holding to the line that senior bondholders in Anglo (and other banks) must continue to be repaid too. As a result, the current Government has a lot of reasons for not wanting the Greeks to go quite so "big".