Beware of Greeks Bearing Bonds

THE MARKETS have been temporarily buoyed amid optimism that European leaders will find a solution to the debt crisis.  Unfortunately, the optimism is likely to be short lived because the problem with Greece is not just that they owe everyone a lot of money.  Greek debt is a symptom of a more endemic problem rooted in the Greek culture.

Michael Lewis, writer for Vanity Fair, revealed the story of how Greece meandered towards its current nadir: tax evasion the norm, bribery a way of life, and the Vatopaidi monks obtaining a gift of Greek commercial property worth over a $1 billion. 

His intriguing and insightful article, “Beware of Greeks Bearing Bonds“, uncovers the human story behind the Greek debt crisis. It is not a short piece, but if you have 15 minutes and are interested in the current affairs then it is well worth reading.

Greek default in all but name

Whatever you say it is, it isn’t ~ Alfred Korzybski

IN OCTOBER 2011, private banks accepted a 50% writedown on Greek debt. European leaders negotiated the writedown to avoid a technical default.

It is surprising that ratings agencies did not classify the writedown as a default when you consider that S&P defines sovereign default as “the failure to meet interest or principal payments on the due date…contained in the original terms of the rated obligation when issued”.

In your author’s opinion, the writedown of Greek debt falls clearly within the S&P definition of sovereign default.

Undeterred however by rating agency definitions, European leaders have characterised the writedown as a voluntary “private-sector involvement” or PSI. This is clever politicking because a “private-sector involvement” sounds like a positive development. However, in reality, it means that private investors have lost 50% of their investment in Greek bonds.

European leaders are now using the same brand of financial wizardry which created the global financial crisis in the first place. Over the last few decades, countless risky financial products were sold to investors using harmless sounding terms like “credit default swap”, “mortgage backed security”, “special purpose vehicle” and “off-balance sheet financing”.

Characterising the writedown of Greek debt as “private sector involvement” is more of the same financial manipulation, but it is also shrewd politics. European leaders know that a Greek default could have devastating consequences for the Euro-zone.