The banks need to take their haircuts on Greek debt like men.
The principles of the eurozone bailout became clear last night, even if the details and the signatories remained fuzzy. Have the chieftains secured the best of a bad situation, or are they storing up more trouble for the future? Or even both?
If the Greek problem is the teetering, shuddering burden of debt, then reducing that would seem to be a key plank. The plan, according to some sources, will cut off less than 10 per cent of the €340 billion total debt, which means that growth will still have to account for the rest. Some €109 billion, for the sake of a breath, will be loaned by the eurozone at periods of 15 and 30 years and at a steady coupon of 3.5 per cent. (Ireland and Portugal will also benefit from lower rates, Spain and Italy from pre-crisis bank recapitalisation.)
The private sector aspect is the most fascinating. The effective haircuts on private lenders – for Greece and Greece alone, Sarko and Merkel said – will cost €37 billion in 2011-14, the leaders estimate; the FT reports that it will be €54 billion, according to the IIR. Bondholders will be 'encouraged' (with sticks?) to roll over their holdings.
This will be seen, almost certainly, as a selective default by the credit ratings agencies, no matter how quickly it is put back to normal. Is this a bad thing? Sarko thought so, hence a re-emergence of his perpetual desire to tax the banks instead of forcing a haircut. He feared a Lehman effect, where investors would take to flight and a spiral would begin.
It seems time, in my view, for banks to endure some of the pain the Greeks are. Why should banks be inoculated from every outbreak of economic fever? If you make risky bets on a country with accounting standards and tax-collecting methods as shaky as Greece's, you can't always expect that kindly mother eurozone will protect you. This is true not least because the less the pain for the banks, the greater for the Greeks, who will soon be austeritied into nothingness.
Once again we confront moral hazard. The last time we stared at it and it blinked, Lehmans vanished and so did trillions of dollars. That would be a disaster if it recurred in a similar form now. But if the buyers did not beware, they need to take their short back and sides like men.