Greece May Default on Government Holdings, Jacob Kirkegaard Says

Thursday, 01 Mar 2012 01:11 PM

 

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Greece will probably default this year on European governments’ holdings of its sovereign debt, according to Jacob Kirkegaard of the Peterson Institute for International Economics.

The country published the formal offer last week for its agreement to exchange bonds for new securities, with private- sector investors taking a loss of 53.5 percent. While the European Central Bank won’t take direct losses from the swap agreement, the writedown may make it more politically feasible for governments to lose money on Greek debt, Kirkegaard said.

“The key thing about this is it’s a political issue, and therefore sequencing matters tremendously,” Kirkegaard, a research fellow at the Peterson Institute in Washington, said today in a radio interview on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene. “It’s going to be essentially one government defaulting against the taxpayers of another.”

Default insurance on Greek debt won’t be paid out even after the nation negotiated the biggest sovereign-debt restructuring in history, the International Swaps & Derivatives Association ruled today.

The ECB’s exchange of Greek bonds for new securities that are exempt from losses being imposed on private investors hasn’t triggered $3.25 billion of outstanding credit-default swaps. ISDA’s determinations committee said the switch didn’t constitute subordination, one of the criteria for a payout under a restructuring credit event.

The ISDA decision may undermine investors’ willingness to use the derivatives, Kirkegaard said.

‘Begin to Doubt’

“If I were a buyer of industrialized sovereign credit- default swaps, I would strongly begin to doubt that I would ever get a payout,” he said.

Euro-area finance ministers cleared the issuance of bonds for the Greek debt swap as they reviewed the nation’s progress on meeting the conditions for the aid.

The officials, gathering in Brussels today before a summit of leaders from the 27-nation European Union, approved the 130 billion-euro ($173 billion) package last week and are maintaining pressure on officials in Athens before releasing cash. Luxembourg Prime Minister Jean-Claude Juncker said the payment would be made before a March 20 bond redemption.

The ministers authorized the European Financial Stability Facility to issue bonds for the debt swap, Juncker said today in a statement.

Pension Cuts

Greek lawmakers approved cuts in pensions and health care a day after ratifying 3.2 billion euros of spending reductions, trying to meet conditions for the bailout.

Forcing Greece to leave the monetary union isn’t “really a viable strategy,” Kirkegaard said.

“If you sent the signal that a country could be summarily pushed out of a monetary union, I think that would be the de- facto reintroduction of foreign-exchange risk into the euro area,” he said. “If you were to initiate such a process, would you keep your deposits in a Portuguese bank? I’m not sure you would, and that’s the issue.”

The Peterson Institute was established by Peter G. Peterson, co-founder of Blackstone Group LP.


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