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The sooner Greece imposes a haircut, to use the financial market’s term for losses incurred in a default, the better it will be for everyone. Delay leads to bigger haircuts, and economic research suggests the bigger the haircut, the worse the pain that follows. The damage being inflicted on the Greek economy is too great. And once defaults within the euro area are accepted, a sensible conversation about how to fix the single currency can begin.
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A paper presented at the Royal Economic Society conference in London this month by Juan Cruces and Christoph Trebesch studied all the debt restructurings between countries and foreign banks and bondholders since 1970 -- a total of 202 cases in 68 nations. It found that “restructurings involving higher haircuts (lower recovery rates) are associated with significantly higher subsequent spreads (borrowing cost) and longer periods of capital market exclusion.” In other words, the worse the losses inflicted on the bondholders, the more the markets will punish you later on, and the longer it will be before you can access the capital markets again.
Greece’s debt position is worsening. Delay isn’t an option. It would be better to impose a 40 percent or 50 percent loss on bondholders this year than a 70 percent or 80 percent loss in 2013.
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Lastly, once Greece has defaulted, a serious conversation can begin about how to reassemble the euro area. Plan A was to rescue Greece, arrange a bailout, get the country back on track and stop the contagion. It’s as clear as day that it hasn’t worked. Greece isn’t showing signs of recovery, and both Ireland and Portugal have had to apply for bailouts as well. If that doesn’t persuade people to switch to Plan B, it’s hard to know what will.
http://www.bloomberg.com/news/2011-04-25/greece-haircut-for-bondholders-already-overdue-commentary-by-matthew-lynn.html
The sooner Greece imposes a haircut, to use the financial market’s term for losses incurred in a default, the better it will be for everyone. Delay leads to bigger haircuts, and economic research suggests the bigger the haircut, the worse the pain that follows. The damage being inflicted on the Greek economy is too great. And once defaults within the euro area are accepted, a sensible conversation about how to fix the single currency can begin.
...
A paper presented at the Royal Economic Society conference in London this month by Juan Cruces and Christoph Trebesch studied all the debt restructurings between countries and foreign banks and bondholders since 1970 -- a total of 202 cases in 68 nations. It found that “restructurings involving higher haircuts (lower recovery rates) are associated with significantly higher subsequent spreads (borrowing cost) and longer periods of capital market exclusion.” In other words, the worse the losses inflicted on the bondholders, the more the markets will punish you later on, and the longer it will be before you can access the capital markets again.
Greece’s debt position is worsening. Delay isn’t an option. It would be better to impose a 40 percent or 50 percent loss on bondholders this year than a 70 percent or 80 percent loss in 2013.
...
Lastly, once Greece has defaulted, a serious conversation can begin about how to reassemble the euro area. Plan A was to rescue Greece, arrange a bailout, get the country back on track and stop the contagion. It’s as clear as day that it hasn’t worked. Greece isn’t showing signs of recovery, and both Ireland and Portugal have had to apply for bailouts as well. If that doesn’t persuade people to switch to Plan B, it’s hard to know what will.
http://www.bloomberg.com/news/2011-04-25/greece-haircut-for-bondholders-already-overdue-commentary-by-matthew-lynn.html
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