Greece: Dangerous precedent?
- 21 February 2012
- From the section Business
I am on my way to Rome to talk to a taxi driver about the eurozone crisis.
No, not because any rational person would have lost faith in the ability of the European Union's leadership to rebuild confidence in the strained currency union - but to see the impact on livelihoods of attempts by the Italian government to woo investors by modernising the economy, which includes abolishing restrictive practices (including the system for licensing taxis).
But as dawn has broken over London, I have been breakfasting on the statements by eurogroup finance ministers and the committee negotiating on behalf of private-sector lenders to Greece, which in theory represent a historic breakthrough in attempts to avert a default by the Greek government.
I have three thoughts.
First, that if private sector lenders sign up to what their negotiators have agreed with the Greek government, it will be momentous: a reduction of 53% or 107bn euros ($142bn; £90bn) in the face value of what the Greek government has borrowed.
In the long and tawdry history of governments borrowing more than they can afford, this represents a remarkably huge, unprecedented write-off - all the more astonishing because Greece is a pretty small economy.
In the cold light of day, it is not clear which is the more depressing: that successive Greek administrations ever thought it sensible to borrow as much as they did, or that banks and investors thought it wise to lend to them.
Those who believe in the pure rationality of markets or of the state may need to re-examine their respective faiths.
Second, I don't know whether it matters that eurozone central banks and governments are making a different sacrifice in respect of their holdings of Greek government bonds than the sacrifice being made by commercial banks and other private sector lenders.
The European Central Bank (ECB) and the central banks are refusing to participate in the exchange deal, by which private sector holders are being asked to exchange their existing Greek government bonds for IOUs worth massively less (perhaps three-quarters less, when changes to the maturity of the debt and interest rates are taken into account).
Instead, the governments of the eurozone have said they will not take any interest on their central banks' holdings of Greek bonds till 2020 and will also parlay any profits on their holdings of these bonds into a reduced interest rate on their rescue loans to Greece.
These different sacrifices for central-bank holders of the bonds are being made because the central banks wish to maintain the curious fiction that they were not taking risks with their own solvency when purchasing government bonds.
They don't want the humiliation of taking direct losses on the bonds and being forced to ask eurozone taxpayers for additional capital to strengthen the ECB's balance sheet.
But through the slightly weird financial engineering the central banks have chosen instead, they have created the bizarre concept that a bond can be worth more or less depending on whether it is held by a commercial bank or a central bank.
For reasons that I can't quite put my finger on, that makes me feel uncomfortable. I guess it's because it erodes one of the simpler truths of investing - that the value of a bond or security depends on the credit-worthiness of the issuer, not the political interests of the holder.
Finally, and to state the bloom' obvious, what we had overnight is an agreement in principle, not a final definitive rescue of Greece.
Before we crack open the vintage Ouzo, let's just see how it goes down with the relevant private-sector lenders, politicians in the only creditor country that really matters - Germany - and Greek citizens, who are being asked to sign up for years of declining living standards with no promise about when and whether the better times may return.