On my previous post I wrote about interest rates and sustainability of the Greek debt. It is clear that with those numbers debt can't be served. We talked a bit about haircut and now everywhere in the news we hear about PSI and disputes about the level of percentage. The question is whether haircut is a good solution or not and if it’s the only way for salvation.
Bankers, IMF and Greek government have all agreed more or less to the rules that will follow. First of all with haircut, only a percentage of the total debt will be erased. Debt that European countries own won't be reduced at all and possibly the same rule will apply for the Central European bank as well. A big percentage of the other debt is held by Greek banks and Greek social security which will cause a serious damage and will need new loans to repair it. The problem with this path is that many European countries are in debt right now and it will be more likely to use the same solution for them as well. What will happen in this occasion? Especially if CDS are paid in Greece, markets will push for default in other countries and a chain reaction will follow!
Now how else can we solve this problem? In my humble opinion, trading old bonds with new having the same named value but much lower interest rater and 20 year pay time, will be a much better solution, for Greece, Europe and the whole world. See Japan as an example, they have a 197.5% debt and their rates are bottom low! In other words, which of these two would you prefer, debt of 200billion with 4% interest or 400billion with 1% interest? The answer is obvious I think...
It is worth mentioning that even a 4% interest rate will be tough for such a small economy shrinking year after year.
Bankers, IMF and Greek government have all agreed more or less to the rules that will follow. First of all with haircut, only a percentage of the total debt will be erased. Debt that European countries own won't be reduced at all and possibly the same rule will apply for the Central European bank as well. A big percentage of the other debt is held by Greek banks and Greek social security which will cause a serious damage and will need new loans to repair it. The problem with this path is that many European countries are in debt right now and it will be more likely to use the same solution for them as well. What will happen in this occasion? Especially if CDS are paid in Greece, markets will push for default in other countries and a chain reaction will follow!
Now how else can we solve this problem? In my humble opinion, trading old bonds with new having the same named value but much lower interest rater and 20 year pay time, will be a much better solution, for Greece, Europe and the whole world. See Japan as an example, they have a 197.5% debt and their rates are bottom low! In other words, which of these two would you prefer, debt of 200billion with 4% interest or 400billion with 1% interest? The answer is obvious I think...
It is worth mentioning that even a 4% interest rate will be tough for such a small economy shrinking year after year.
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