Wall Street Journal
February 22, 2012
With Tuesday's vote, the finance ministers of the European Union have agreed to a second giant Greek bailout, just two years after the May 2010 bailout that was supposed to be all that was needed. While the day-to-day machinations of this long saga seem monotonous from afar, a closer look reveals several changes that bode well for the future of economic policy in Europe.
First, the new bailout involves a substantial write-down of Greek bonds—close to 75% of their economic value. At the time of the first bailout and until very recently, all parties to the funding agreements denied the possibility of a write-down, claiming that the problem was illiquidity not insolvency. Many of us with experience from emerging market crises of a decade or more ago recommended admitting the insolvency problem at the start, restructuring the debt, and moving on with economic reforms. Alas, we also knew it is not unusual for international officials to be slow to realize and admit the obvious.
Second, the fears of contagion—that a write-down on Greek debt would cause a run on the debt of other European countries—are far less than they were two years ago. Investors have adjusted their portfolios, foreign bank exposure to Greece is way down, and the correlation between spreads on risk-sensitive Greek credit default swaps and spreads on default swaps on sovereign debt elsewhere in Europe has declined.
Moreover, the anticipated orderly write-down will be far less damaging than a sudden default. Even if it triggers default-swap payments, those should be manageable, since the outstanding credit default swaps on Greek debt total only about $3 billion.
More
No comments:
Post a Comment