Haircut: More dangerous than it sounds

If Greece accepts the terms of a new aid package it's expected to get a haircut on its debt. But Marketplace Sr. Editor Paddy Hirsch explains why that haircut is more like a scalping -- and it's not Greece that will suffer the pain.

More Whiteboard at: www.marketplace.org/whiteboard

Category:

News & Politics

Tags:

• whiteboard
• ECB
• European Central Bank
• loans
• banks
• haircut
• economics
• Greece
• Greek

[himakgam]

cheap shot primitive video.

[midgetman8888]

i love how he just throws the pen away at the end. always. hahahahaha

[fububalla]

Maybe those banks shouldn't be in business. It's called capitalism. Not "I have a bad business model, now give me more taxpayer money"

[FreeBeeez]

We are dealing with currencies that are not backed by anything and where printing money is a way of getting out of debt by debt. Therefore, it's a big monopoly game where kids play with paper. If you consider that bank work with fractional reserves, you then see that 9/10 of the money being loaned is actually created out of thin air. Depositer's money only represent 1/10 of the loan contracts. Therefore all the debt that is being created is actually created out NOTHING. Why reimburse?

[Derukugi2]

@h1rschp

It happened exactly as predicted by the Eurocritics back then.

Single currency for such diverse nations as Greece and Germany means either bankruptcy for the weaker ones, or an open-ended transfer union.

Turns out we get both... since Germanys pockets are not unlimited, at the end of the transfer union there is bankruptce for all. Then bankers/gamblers did not figure on that....

Thanks Euro, thanks bankers.

[Derukugi2]

Yep. Remember Bill CLinton and Glass-Stegal Act? They opened the barn door, now they are crying foul because the horses ran away.

[belibem]

that is what happens when deposit banks and investment banks merge

[h1rschp]

@1czelaya Yes, they only have to have a certain amount of money in reserve, it's true, so a run on a bank can be disastrous - as it was for IndyMac in 2007, for example. But the FDIC doesn't insure money printing - it only insures depositors money, not the banks'. In Europe, the EFSF might give the banks the money they need to make payments to depositors if there was the possible run, but it would be in the form of a bridge loan, which the banks would have to pay back once they're solvent.

[h1rschp]

@sgalt1981 It turns out that ISDA is ruling that the haircut, because it is voluntary, does not count as a credit event. In other words, because the lenders have accepted that they'll only get 50% of their money back, and agreed to that, the debt insurance does not kick in. The European CDS market is now in a real mess as a result.

[h1rschp]

@Itsjames1 The banks made these loans at low rates because they figured that Greece's inclusion in the EC and the Eurozone made it a much more solvent nation (with all those trading relationships) and thus a safer bet. For example, in Italy's case, the yields on the country's ten year bond dropped by 50% when Italy joined the Euro. Something similar happened with Greece. But it turns out the banks were dead wrong.