Merkel Proposing Orderly Default Framework

Mrs Merkel has been speaking in the German parliament about her latest financial proposals. In addition to defending the CDS and short-selling proposals, the Germans are apparently preparing proposals for an “orderly insolvency of euro-region states”.  In a separate story this morning, I see that former Fed Governor Rick Mishkin has been reported as follows: 

“What they should have done was to let Greece go and say we are going to ringfence the rest of the system,” Mishkin said. “Ringfence the banks, protect the other countries that have problems such as Portugal, Italy and Spain, which have not been fiscally irresponsible the way the Greeks have been.”

It’s interesting to see how far the consensus has moved. We’ve gone from the idea that no Eurozone country can be let default and the IMF can’t possibly be allowed to help to getting ready for orderly defaults.

28 replies on “Merkel Proposing Orderly Default Framework”

I only wish they had accepted this from the first. The refusal to contemplate IMF involvement in Euro-area countries has caused the treaties to be contorted out of all recognition. They have ridden a coach and horses through the Union as it was, all to save face

As a friend of mine with whom I correspond likes to say, someone has been reading my emails.

Greece doesn’t have a currency problem It has a debt problem and an orderly default/restructuring/rescheduling is the only answer.

Karl Otto Pöhl, late of the Bundesbank, was interviewed by Der Spiegel yesterday. He called for a Greek haircut and (gratifyingly) described the EU’s no-default plan as a bailout for rich Greeks and (mostly French) banks. Is Merkel’s conversion to restructuring a genuine preparation for a future contingency or just something she is saying to get the existing, unchanged plan through parliament? Either way it is a significant shift all right.

I have argued for some time that I can’t see any way out for Greece and that the bailout merely delays the inevitable. The big questions are, how best to manage the default, whether the same treatment is required elsewhere and what are the consequences for the financial system. If this is limited to Greece it ought to be managable and a relativley small amount of cash will soften the blow to the financial system. Scenarios involving Spain and Italy are not going to be pretty.

Long-term orderly defaults of sovereigns and banks is exactly what the market needs. It is just going to be a messy short-term gettting there.

This shift in position seems to be in support of what K Whelan has been saying for some time – that on the surface of it, a sovereign default by Greece need not spell disaster for the euro.

If this is so, then it is interesting to consider how such a consensus emerged around the contrary hypothesis – that Greek default would somehow cause the euro currency to fracture, or represent a mortal blow to the EU itself.


This might be slightly off topic but:

Banks with more deposits than they can place in profitable lending used to be able to easily justify having a bond trading desk. Now it appears that the bonds that have been bought weren’t as safe as expected, banks who sold bonds seems to have used softer (too soft) lending criteria and countries with deficits might have to restructure their debts. The profits for buying bonds might not be profits for much longer…..

In the current environment: What are the benefits of having a bond trading desk compared to either lending more where the bank has full control of the lending decisions and/or decrease the amount of deposits taken?

Lower the interest given to savers in Germany & France and maybe (unlikely but still) the savers might opt for spending instead, thus rebalancing the conomy a bit. Or maybe with lower cost of capital the banks in those countries might stop from going for the higher yield/risk bonds 😉

Question is – do the Germans really care about the Euro? The dangers posed by a default to the Euro are in some ways unknowable. The fact is that this is a now a risk the Germans are willing to take.
Methinks Deutschland has had enough of it’s expensive delinquent neighbours. This structured default is really no more bailout. Auf wiedersehn Euro!

If we go down this road with Greece, then exactly how are they going to convince investors to continue buying bonds in other countries that have been tarred with the same brush? Ring-fencing is easier said than done. We saw what happened to our interest rates when it looked like Greece was not going to be rescued. If we go down this road the entire periphery may as well ‘restructure’ in one go, and get it over with.

The way in which the only plausible leaders the EU has seem to be making it up as they go along is alarming.

Even calling it a project denotes a certain lack of emotional attachment to European Union. Nobody makes sacrifices for a project – a dream/a vision or a nation maybe but a project….I don’t think so.
I could be wrong on this but the European project really began with a bumper bailout at the end of WW2 in an attempt to stop the Europeans tearing each other to shreds and to to provide some kind of bulwark against communism.
The political will for it to survive is weak.

@Kevin O’Rourke – “The way in which the only plausible leaders the EU has seem to be making it up as they go along is alarming.” – totally agree. Everyone is looking after their own interests, but pretends to be showing solidarity. There was an interesting account of the negotiations of the 750bn deal in Die Welt am Sonntag, last sunday – very scary stuff indeed. What is needed is a bit of deciciveness instead of the dithering.

“If we go down this road the entire periphery may as well ‘restructure’ in one go, and get it over with.” – I raised that possibility in the Sunday Business Post a couple of weeks ago. The instinct in Germany is to let Greece drop, but they worry about the consequences and who is going to get blamed, so now they are getting around to the idea of a structured default. They could handle Ireland and Portugal too but I am not sure about Spain and Italy.


The self-interest of the banks and their agents, and its Siamese twin, the imperative to have no more Lehmans no matter what. Both of those goals require that the banks be protected from a Greek default, but it’s much easier to sell Germans on saving the Euro, or even saving Greece, than on saving SocGén. Also a touch of untenable EU hubris (“default in our glorious Eurogroup?”).

Mind you, the banks may have a point. Is anyone confident that even an orderly Greek default won’t be another Lehman?

Will there be ripple effects for any American states equally under the water. I read somewhere that some states are paying bills with IOU’s

> Also a touch of untenable EU hubris (”default in our glorious Eurogroup?”).

Well, that and an unresolved tension at the heart of the Eurozone – is it the embryo of a fiscal union where the centre both stands behind, and has final control over, the members’ budgets, or is it a union of sovereigns where neither is the case? (Of course this ambiguity isn’t entirely unintentional; witness for example Joschka Fischer and the ‘inexorable “federal logic”‘.) Even now the German government is still chasing both hares, pushing deficit sanctions at the same time as it talks about allowing for default.

If I was a German Bank CEO and presumably CDU supporter to boot, I would not be best pleased at Frau Merkel. By hinting at “orederly restructuring ” or defaul and possible exit from the euro along with a liability tax on German banks she has severely devalued the equity. The reason being German banks have over exposure to assets in the periphery and funded this with liabilities from the core. Default and/or devaluation will take them down. If I was a Mittlestand CEO, I would worry about loss of my export markets.

If I was a German saver, I would worry that my job and my savings were at risk.

If I was An Taoiseach, I would be exploring the possibilities offered by the Chencellor. Default, devaluation and tighten fiscal policy. Have we got the cash from the ECB for the NAMA bonds yet!!!

Within the EU all stimulus was left to market forces. When German savers had nowhere profitable to wharehouse their considerable savings they started buying bonds in Anglo Irish as well as Greek government bonds. The Anglo money (and I also suspect the Greek) was spent building expensive follies.

Merkel has recognized the inevitable. The Greeks won’t or can’t pay. Ireland has a very nice minister of finance who said that the Irish debt is manageable and that the paddies are quite happy to see an increase in taxes as services are cut to pay for the follies. However unfortunately democratic governments change…

Economic warfare.

Poor little Ireland: bankers raping nuns as they trample across Leinster!

Please read the article for an answer! To everyone else, Greece will lose half its GDP and still face all its debt. Bit like Ireland really, as when the building demand does return, there will be no cpaital for banks to offer mortgages. (Only joking! Capital like that is made by fiat.)

Economic warfare has been practised by Europeans against the rest of the world, with the Americans eventually beating them at their own game. Now there is a fight back, with China, Taiwan,Korea joining in. Japan is a bit of a casualty, but doing OK since it is shrinking population. Debt per capita is rising a little ……

@ tull mcadoo

There’s no need to put champagne on ice.

There will be no free lunch.

A star chamber would have to review an application for a new bailout and all EZ members would have to give their consent.

No updates on benchmarking ATMs on horizon.

@Pat Donnelly – sorry, thought you were referring to the haircut. Yes the Greek economy is going to contract massively – 75% of GDP is consumption. This has massive implications for the haircut – if GDP drops by 50% then a 50% haircut might not be enough!!!

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