Found this to be a very interesting article in the Wallstreet.
EU's Greece Deal Has Dose of Irony
By FRANCESCO GUERRERA
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Fatta la legge, trovato l'inganno. "Make the law and a way will be found around it." The Italian proverb is a sadly apt footnote to the latest round of European shenanigans.
WSJ's Francesco Guerrera discusses the European bailout plan reached this week and harkens back to an Italian proverb: Fatta la legge, trovato l'inganno. "Make the law and a way will be found around it." Photo: REUTERS/Yves Herman
As the stock market and the euro celebrated a deal on Greek debt that maybe, just maybe, could put an end to two years of bumbling procrastination, a bitter irony emerged from the 15-page statement penned by bleary-eyed bureaucrats Thursday.
After spending the aftermath of the financial crisis hogging the moral high ground and criticizing "Anglo-Saxon capitalism" for its penchant for financial engineering and excessive leverage, European Union leaders employed some of the same devices for Greece.
The plan was passed, but not without getting around some of the principles outlined after the 2008 debacle.
Take the idea—central to a solution of Greece's woes—that the country will undergo a "controlled default" in which banks and other debt holders would "voluntarily" agree to shoulder a 50% reduction in the value of their securities.
That is financial engineering at its most Machiavellian. The deal is designed to avoid triggering the payment of credit-default swaps on Greek debt, the much-maligned securities meant to insure against precisely this kind of scenario.
The structure is not much different from the accounting contortions used by banks during the 2008 crisis to avoid bearing the brunt of mortgage-related losses.
The reasons for such a move are unclear. Some EU officials talked about the need to avoid a domino effect similar to the chaos that ensued when Lehman Brothers Holdings Inc. went bankrupt in 2008. But the real motive is that these leaders didn't want to preside over the first EU default.
Still, by undermining the value of Greek CDSs, European leaders have created a precedent that will weigh heavily on the market in future crises. While CDSs attract speculators, a lot of banks and fund managers buy them as protection against catastrophe.
Paradoxically, the second key element of the Greek plan is a CDS-like instrument for Italian and Spanish debt.
Because the European Financial Stability Facility—the rescue fund for the euro zone—didn't have enough money to reassure the markets it could do its job, the EU leaders tried to leverage the funds through financial wizardry.
The EFSF will now be able to use €440 billion ($612 billion) to guarantee about €1 trillion of bonds.
How so? By promising investors they will be covered only for about 20% of their losses in the event of a default.
The problem, as Lehman, Citigroup, AIG and the other overleveraged firms found in 2008, is that when the going gets tough, investors may not be satisfied with a partial solution backed by only a fraction of the money needed.
The latest plan might still work if it boosts confidence in the euro zone. Thursday's market rally is a good first sign.
But the seriousness of the situation deserved more than creative accounting and confidence tricks. As a speaker told an American audience last year: "By ensuring that capitalism and the market economy do not become caricatures of themselves, we will save the market economy and capitalism."
The speaker? Nicolas Sarkozy.
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