LBS: Private-Sector Involvement “a good idea”

Karl posted a link to yesterday’s speech by Lorenzo Bini-Smaghi.  I would focus on his theme  that debt restructuring is a good idea but that it should be used as a last resort, rather than pre-emptively.  Some relevant quotes:

The point I would like to make is that having the private sector actively involved in preventing and resolving sovereign crises is a good idea.

and later

This is why such restructuring should only be the last resort, i.e. when it is clear that the debtor country cannot repay its debts.

and

Where is the problem? The problem emerges when debt restructuring is carried out not as the last resort but as a preventive tool, even becoming a precondition for receiving (or providing) financial assistance, a point mentioned in some official circles since mid-October 2010. Debt restructuring would be a way to tackle not only dramatic cases of insolvency but also any difficulties countries face in accessing the financial markets.

Accordingly, the speech usefully boils down the argument to its essence –  at what point should policymakers insist on private-sector burden sharing vis-a-vis sovereign debt?  LBS provides reasons to argue that it is too early to close off other options; others will judge that it is better to eliminate the debt overhang now.

Charlie Rose: The State of the U.S. Economy

For something a bit different, Charlie Rose hosts an interesting round table discussion on the U.S. economy with David Walker, Jared Bernstein, Paul Krugman and Kenneth Rogoff.   See here (36:38 minutes; click on the picture).

Update: Readers might also find interesting this NYT op-ed by recent Nobel winner Peter Diamond on the withdrawal of his nomination for the Board of Governors of the Federal Reserve.

LBS on Private Sector Involvement

With things heating up in Greece, Lorenzo Bini Smaghi today outlines his case against debt restructuring in Greece. He argues four points:

First, as I already mentioned, it would not be a way to prevent taxpayers from suffering the consequences of bad investment decisions. In our Monetary Union, given the integration of financial markets and the single monetary policy, the taxpayers of the creditor countries would suffer in any case. According to the Financial Times, for instance, a default on Greece’s debt would cost the German taxpayers alone “at least €40 billion”.

Second, this would be a way to punish patient investors, who are sticking to their investment and have not sold their bonds yet, and are confident that with the adjustment programme the country will get back on its feet. Restructuring would instead reward the investors who exited the market earlier or short-sold the sovereign bond, speculating that they would gain out of a restructuring.

Third, it would destabilise the euro area financial markets by creating incentives for short-term speculative behaviour. Given that markets are forward-looking, they would try to anticipate any difficulty faced by a sovereign by short-selling their positions, thus triggering the crisis. This would discourage investment in the euro area because of its potential volatility and perverse market dynamics.

Finally, such a measure would delay any return to the market by a sovereign, because no market participant would be willing to start reinvesting in the country for a long period if they know that this kind of investment might at some stage be penalised. This would thus discourage private sector involvement and oblige the official sector to increase its financial contribution.

These don’t strike me as very strong points.

On the first point, well yes “taxpayers” in Germany who own Greek bonds will lose out but the bonds are already trading at a huge discount to face value so, for many, the losses have already been taken and the price of the bonds factors in a restructuring.

The second point amounts to saying we should reward people who make wildly inaccurate judgments about the Greek macroeconomic situation, i.e. those who “are confident that with the adjustment programme the country will get back on its feet” should be rewarded. Should those investors who believe in Santa Claus get cheques from the EU and the IMF at Christmas?

The third point that investors would look to sell sovereign bonds of peripheral countries in anticipation of a restructuring appears to ignore that this has already happened. For example, Irish sovereign bond pricing is based on the assumption of a restructuring.

The final point, that a restructuring would delay Greece’s return to the market is debatable. Even if debt ratios stabilised over the next few years, private creditors will still see huge risks. A restructuring that restores sustainability, however, would be more likely to restore access to private bond markets.

If these are the best points the ECB have, you can see why they’re losing the argument.

Squeeze Is On for Greece’s Private Sector Creditors

Here’s a thread for people to discuss the latest stories (here and here) on Greece’s private sector creditors being asked to roll over their funds or else. A quick summary:

The governments will give Greece new lending, to be provided by the European Financial Stability Facility, the euro zone’s sovereign rescue fund, officials said. But that financing will likely come with the condition that the banks, pensions funds and other investors holding Greek bonds agree to exchange them for new bonds with a longer maturity to help fill Greece’s financing gap over the next three years, they said.

“Private investors would have a strong incentive to participate, because if they don’t, there will be a default,” said one official.

It’s the Don Corleone approach to default negotiation, involving making people offers they can’t resist.

Still, providers of CDS insurance will be thrilled to hear that

the debt-exchange process envisioned by the governments won’t rewrite existing bond contracts or trigger a credit event, the officials said, partly easing the ECB’s concerns that private creditors are being forced to contribute financing.

Can someone explain to me why it’s so important to the ECB or any government whether a restructuring scheme constitutes a credit event for CDS purposes? Are the firms that offer this insurance somehow more important sources of systemic risk than those who own Greek sovereign bonds? Or is it more for the appearance of purity — “it was not a default, now way, sure the CDS guys say it wasn’t a credit event”, that kind of thing?

Anyway, what odds are there now that holders of Irish sovereign bonds will walk away unscathed?

Anglo Bondholders to be Repaid in Full

Today’s Sunday Independent appears to provide the answer to the question I posed on Tuesday about the government’s position on Anglo bondholders. Despite Brian Hayes stating firmly on April 2 (go here and click on the April 2nd edition of Saturday View, about 56 minutes in) that the government’s position was that haircuts should apply to Anglo senior bonds, the Independent reports that the Department of Finance has confirmed that Anglo’s senior bondholders will be repaid in full.

This is a good time to point people in the direction of NAMAWineLake’s very useful post from Friday detailing all the outstanding bonds of the Irish banks by maturity. November 2nd promises to be a great day for those international hedge fund investors who chose to buy some of the $1 billion senior unsecured Anglo bond first issued in November 2006.