Monday 23 October 2017

We need to be as much of a danger as the Greeks are

Europe should be working with us on our bailout instead of adding punitive conditions, writes Brendan O'Connor

If you wanted to try to be optimistic you could argue that there is a sense of reality dawning in Europe, and indeed, in Ireland. It was refreshing to hear Jean-Claude Juncker speak last week about the prospect of a soft restructuring, or a reprofiling, of Greece's debt. Olli Rehn seemed to agree with Juncker. Presumably they, and elected European finance ministers, agree that the alternative to a soft default for Greece right now is a real default sooner or later.

The markets are currently pricing in a 66 per cent chance of a Greek default in the next five years -- in other words they believe it is a twice as likely to happen as not to happen. Eighty-five per cent of investment managers surveyed by Bloomberg believe Greece is going to default.

It should be said that the markets regard re-profiling or rescheduling or soft default or whatever they're calling it today, which involves moving out Greece's debt maturity dates, as being a de-facto default, because, as far as they are concerned, it lowers the current monetary value of the debt. So, for example, €50bn you're going to pay off next week is worth more to a bondholder than €50bn with a maturity date in 20 years, even though you will keep paying the same interest over the extended period and you will ultimately pay off the principal. But there seems to be a feeling among some European politicians that a soft default would not trigger a so-called credit event, which is, one gathers, a Lehman's type meltdown.

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