Wall Street Journal
June 29, 2011
How much for the island of Mykonos? The Mexican standoff between European banks owning Greek debt and Greek taxpayers needs fresh thinking. I'm convinced that the only way out of Europe's financial crisis is for Germany to essentially own Greece.
How did we get here? Start with this: European accounting rules allowed Greek and other sovereign debt to be viewed the same as cash on European bank balance sheets. These bonds count toward a bank's capital base and new loans can be written against them without changing a bank's loan loss reserves.
Given this preferential treatment, and insured against default with good old credit default swaps, way too many increasingly worthless Greek bonds are now stuck inside German and French, and of course Greek, banks. Because of out-of-control government spending and entitlements, some half a trillion of Greek debt, 150% of the country's gross domestic product, is scattered throughout the world.
Of course Greece wants to default so it can start over again. Who wouldn't? But the Germans won't let them default, as that (and subsequent defaults in Italy, Spain and Portugal) would send virtually every European bank into insolvency. I don't know if these banks are carrying Greek debt at face value—they won't say. But a good bet is the bonds are not marked to market, which today might be 50 cents on the euro. U.S. insurer Aflac has already written down almost $1 billion in losses from sales of European debt. A stress test of Europe's banks is due in July. We'll see who fesses up.
So the Germans push for austerity, a much-needed cutback of pay and benefits and even jobs to the 25% of Greeks who work for the government. (What's a Grecian urn? Way too much!) In response, the Greeks riot.
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