Alexander Higgins, Contributing Writer
UK Government prepares for Euro collapse and nuclear financial fallout of Moody’s officially declaring a Greece default on their sovereign debt.
Greece has now become the first developed western nation to default on its sovereign debt and, while the media is downplaying the consequences, no amount of propaganda and deception will be able hide the debris that will be scattered across Europe once the the financial shit-storm is done blowing over.
The consequences will be severe indeed as the spotlight focuses on the rest of the PIIGS nations while investors are forced to consider the situation in Greece, which does not bode well for the economic future of these nations nor is it a good omen for the future of the Euro.
While this can easily be written off as the speculation of some blogger, you’ll see below that the BBC reported that even the UK government issued a red alert warning just yesterday running the headline “UK must prepare for the collapse of the Euro” predicting that the events that unfolded today would soon come to fruition.
For those not following what just happened, earlier the IDSA declaration of a “credit event” that triggers credit default swaps and Fitch downgraded Greek debt to “restricted default” following a debt swap deal to keep the Greek government alive by securing an EU bailout.
Reports have now just hit the wire that Moody’s has declared Greece in default, which will have dire consequences on Greece and the entire Euro-zone area.
For those wondering which EU nation is next, the answer is of course Portugal.
Recent days have seen a mass exodus of investors’ money as the Troika gave their first indications that Portugal will be forced to restructure their debt in the same manner as Greece.
Of course, we now know that means a default on the nation’s sovereign debt, which then runs the risk of the contagion spreading all across Europe and finishing in a crescendo tidal wave that may finally land on the shores of the United States.
First reports we’ll look at reports from RT and Press TV on the Greece default, then a report from Zero Hedge on the immediate ramifications the default will have, followed by the BBC article warning of the collapse of the Euro and the political unrest such an event will have.
Moody’s: Greece has defaulted
Moody’s Investors Service considers Greece to have defaulted per its default definitions. The announcement comes despite Athens reaching a deal with private creditors for a bond exchange that will shave €107 billion from its €350 billion debt. […]
Eventually, the overall cost to bondholders, based on the present net value of the debt, will be at least 70 per cent of the investment, Moody’s explained.
“According to Moody’s definitions, this exchange represents a ‘distressed exchange,’ and therefore a debt default,” the US rating firm said. “This is because (i) the exchange amounts to a diminished financial obligation relative to the original obligation, and (ii) the exchange has the effect of allowing Greece to avoid payment default in the future.” […]
On Friday, Athens announced that it had carved out a crucial bond swap deal with private investors designed to write off more than €100 million of Greek debt. The bondholders agreed to take huge losses, giving up some 74 per cent of the value of their investment.
The agreement with private investors was a crucial part of a new bailout from the EU and the IMF aimed at averting a catastrophic default which could plunge the entire eurozone into a deep crisis potentially harming the global economy.
Greece is experiencing its worst economic crisis since World War II and has been on the brink of a default with debt equal to 160 per cent of its GDP. RT
Press TV reports:
The US-based credit rating agency issued a statement on Friday, saying that “even as 85.8 percent” of the holders of Greek government bonds had agreed to the plan, the “exercise of collective action clauses that Athens is applying to its bonds will force the remaining bondholders to participate.”
“According to Moody’s definitions, this exchange represents a ‘distressed exchange’ and therefore a debt default.
“The exchange amounts to a diminished financial obligation relative to the original obligation,” the statement added.
Moody’s also said the debt swap deal “has the effect of allowing Greece to avoid payment default in the future.”
On Friday, the Greek government announced that a large majority of private creditors had signed on to a debt exchange plan expected to cancel about 107 billion euros (143 billion dollars) in Greek government bonds.
On February 24, Greece had formally offered private creditors the deal, which is expected to reduce the country’s debt of about 350 billion euros (469 billion dollars). The deal is part of the second bailout package for Greece approved by eurozone finance ministers during a meeting in Brussels on February 20.
According to the second bailout package, Greece will get loans of more than 130 billion euros (174 billion dollars). The first bailout, which was approved by Eurozone finance ministers on May 2, 2010, was worth 110 billion euros (147 billion dollars).
On March 2, Moody’s downgraded the credit rating of Greece to C from Ca and said the country’s debt exchange plan may “constitute a default.”
Meanwhile, in a statement issued on Friday, International Monetary Fund Managing Director Christine Lagarde said the IMF plans to offer Greece a loan worth about 28 billion euros (36.7 billion dollars).
Lagarde’s statement added, “Today I have consulted with the IMF’s Executive Board and on that basis, as discussed with the Greek government, I intend to recommend a 28-billion-euro arrangement under the Fund’s Extended Fund Facility (EFF) to support Greece’s ambitious economic program over the next four years. […] Press TV
Zero Hedge reports on what the consequences of the Greek default.
Greece Has Defaulted: Here Is Where We Stand
After reading this, everyone should have a fairly good grasp of what happened not only today, but ever since the great (and quite endless) European financial crisis took center stage, and what to look forward to next…
In a nutshell—okay, a coconut shell—this seems to be where we are:
1) Greece was able to write off 100 billion euros worth of debt in exchange for a 130 billion rescue package of new debt, of which Greece itself will receive 19%, or about 25 billion, so that it can continue to operate as an ongoing concern. Somehow Greece is in a better position than before, with more debt and less sovereignty and still—by virtue of sharing a common currency—trying to compete toe-to-toe with the likes of Germany and the Netherlands, kind of like being the Yemeni National Basketball team in an Olympic bracket that includes the US, Spain and Germany. At least a “within the euro” default prevented bank runs in Portugal, Spain, Italy et al.
2) As a result of the bond haircuts, Greece has many pension plans that can no longer even pretend to be viable, at least according to the original contracted scheme, but pensionholders still working can take heart in the fact that their current wages will be cut, too.
3) CDS buyers will have to sweat bullets, jump through hoops, and be forced to endure every cliche known to man, but they might end up getting something for all their trouble, provided their counterparty is solvent and that counterparty itself is not heavily exposed to an insolvent party or a NTBTF institution, otherwise known as a Lehman Brothers. Expect the legal profession to be the prime beneficiary of this “event”, as any new CDS contract will be at least a hundred pages of boilerplate longer in the future.
4) Good luck to any less than AAA rated sovereign who wants to issue debt from now on out. That contracts can now be unilaterally abrogated, as Greece’ bonds were with the retro-CACs, bodes ill for attractive pricing from here on out. Peripherals in the EU will suffer most, as they face the added indignity of being subordinated to the ECB at any point the ECB chooses to exercise its divine right of seniority. The thing that used to be called the risk free rate no longer exists. Bill Sharpe take note.
5) One hundred billion euros worth of perceived wealth evaporated. That can not be a good thing for a Eurobanking system already capital short, as it raises leverage (quick back of the envelop calculation) by about 6% across the board. It also will not make the interbank market any more trusting, thus increasing the likelihood of perpetual LTRO. LTRO lll looks to arrive sooner than QE lll.
6) With the drawn-out Greek event and the LTRO, Europe might believe it has firewalled the system for at least three years and limited damage to Greece and Portugal (who will likely undergo a similar default by the 3rd quarter). LTRO-provided liquidity, it is hoped, will lower market rates enough in Spain and Italy so that those countries can meet sovereign bond obligations and both service existing debt and issue new debt. When the LTRO expires in 2015, “hopefully” something called organic growth will have taken over in countries imposing severe austerity measures on their public sectors, so that debt servicing becomes easier. Organic growth obviously is something that comes in a can, a can which has been kicked out to 2015.
7) As Europe now speaks increasingly of greater EU financial integration, Sarkozy’s poll numbers will be the victim and a less EU friendly individual will likely win the upcoming election. Since France and Germany fortunately have a long and storied history of being the best of friends, and no one in either country would ever pander to nationalist sentiments, this shouldn’t present a problem.
8) Given how much angst was caused by the drawn out Greek affair, the Spanish leader knows he has enormous leverage with EU leadership and he can continue to do what he has been doing with regard to ignoring the deficit targets demanded/suggested by the EU. The EU might well bark at him, but they cannot afford to bite at this time. Muchos gracias, Greece Zero Hedge
The BBC reports on the UK government’s issuance of the warning that EURO collapse is next:
Security: UK ‘must plan for euro collapse’
Ministers should draw up plans to deal with a break-up of the eurozone “as a matter of urgency”, a committee of MPs and peers has warned.
The joint committee on the government’s National Security Strategy (NSS) said the full or partial collapse of the single currency was “plausible”.
“Long-term security” is at the heart of foreign policy thinking, the government said in response.
The committee, whose members include ex-MI5 director general Baroness Manningham-Buller, said economic instability could leave the UK “unable to defend itself”.
It added that governments across the EU could be forced to cut defence spending if the instability were to continue.
“International economic problems could lead to our allies having to make considerable cuts to their defence spending, and to an increase in economic migrants between EU member states, and to domestic social or political unrest,” it said.
And, while the committee welcomed the government’s decision to publish the NSS alongside the 2010 Strategic Defence and Security Review, it said that “a clear over-arching strategy” had not yet emerged.
Committee chairman and former Labour foreign secretary Margaret Beckett said: “A good strategy is realistic, is clear on the big questions, and guides choices. This one does not.
“We need a public debate on the sort of country we want the UK to be in future and whether our ambitions are realistic, given how much we are prepared to spend.” […]
The committee said that in an era of “diminished resources”, the UK would have to take on a more “partnership-dependent” role in world affairs.
It stated: “We believe it is totally unrealistic not to expect any diminution in the UK’s power and influence in the medium and long term.”
In response, a government spokesman said ministers remained vigilant and regularly took stock of “the changing global environment” and threats to the UK’s security. BBC
Alexander Higgins is a Senior NJ ASP.Net Developer. If you want the latest buzz, analysis, and news without the snooze, visit his comprehensive work at Alexander Higgins Blog.