She said the model is the Uruguay default in 2003, conducted under the auspices of the IMF when she was working at the Fund. “Everybody got together in a civilized way, and it was very successful,” she said.
The average haircut was 13pc. Maturities were shuffled. Uruguay was praised all round.
Greece is a tougher nut to crack. French banks with €80bn and German banks with €40bn (and British banks too) that bought so much Greek debt at a few basis points over German Bunds in 2006 and 2007 will have to accept a bigger discount to atone for their epic error, perhaps 25pc — though Prof Reinhart did not put a figure on it.
At least US subprime had the excuse of being opaque. It was always obvious that Greek bonds was not equivalent to German bonds, and that country in a currency union running a current account deficit of 15pc of GDP was trouble waiting to happen. Creditors bought the debt on the basis of a political calculation, that EMU would bail out Greece if necessary. It was pure moral hazard.
This “pre-emptive restructuring”, in IMF lingo, has to be handled with care. “When people say there is no contagion risk because Greece is small, they are completely wrong. Thailand was a lot smaller in 1997, and look what happened.” Indeed, it set off the Asian financial crisis.
A Greek default would be twice the size of the two largest defaults in history put together — Argentina and Russia — at least in nominal terms, nearing €300bn. The “demonstration effect” in a long string of countries both inside and beyond EMU might be chilling.
FTAV’s further reading
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Easter eggs‚ spy cats; quant credit, synched brains
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