Setting Up the Greek Default

by Terence Roth

Wall Street Journal
October 11, 2011

The inspectors sent to Athens by Greece’s top creditors have recommended that the Greeks get the next payment of €8 billion from its 2010 bailout agreement. The decision was never in doubt because there wasn’t any other choice.

Greece now says it will run out of cash in mid-November. So the European Union, the International Monetary Fund and the European Central Bank needed to pony up to buy the time needed to prepare for Greece’s default.

There is the size and method of the writing down the value of Greek government bonds held by banks–and possibly EU governments and the ECB into the bargain–to be arranged. Banks need to bolster their balance sheets with new capital to take the losses from the haircuts and brace for any shock to financial markets.

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