Wednesday, June 22, 2011

Roubini Says ECB/Greece Is Delusional Kicking of The Can Down The Road; Ensuring a Default

Nouriel Roubini says that the attempt to apply a voluntary Vienna Initiative to Greece is "just a continuation of the big fudge and delusional kicking of the can down the road that the ECB and the official sector has indulged in for over a year now in Greece".

The ECB has effectively vetoed any bail-in of Greece’s creditors, with Germany joning.  Now the official sector is running out of options for a "meaningful bail-in of creditors". Roubini write in an article for EuroIntelligence.

He comments on the latest idea of a “voluntary maintenance of the exposure of Greece’s bank creditors by inducing them to hold their exposure to the sovereign once their bond claims mature by rolling over their maturing bonds into new bonds". There is nothing voluntary about that.

Adds Robini: "This option has been compared to the Vienna Initiative, which induced the cross-border exposure of foreign banks to the central and east European banking system during the 2008-09 global crisis, when a number of sovereigns and banking systems in that region were at risk of rolling off the claims of foreign creditors.

"A purely voluntary maintenance of exposure at current market rates would make the sovereign’s debt even more unsustainable and, in time, will ensure a default on the new bonds."

He sasy that the only way to prevent the coupon/yield on the new bonds from being close to market rates and thus unsustainable would be to provide the new bonds with seniority or some collateral. However, both options are undesirable as a rollover is not a case of “debtor-in-possession” financing and thus doesn’t justify such credit sweeteners.

"If, instead the rollover occurs at original coupon or well below market rates, so as to provide Greece with some debt relief, the rollover option is not purely voluntary and has coercive elements; thus, it is not different in any substantial way from the orderly debt restructuring, or reprofiling, that the ECB and other official sector folks so vehemently oppose".

"Only an orderly and market-oriented, but partially coercive, debt exchange could restore debt sustainability while avoiding contagion; a purely voluntary approach would make the debt even more unsustainable — and would risk eventually triggering a disorderly workout — if the rollover occurs at market rates that price in massive default probabilities".

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