A 30-Year IOU For Greece

The Financial Times reports that large European banks may extend the repayment terms on Greek debt to a period as long as 30 years. That will not be called a “default,” which shows how muddied the discussions about Greece have become. “Close to 50 people, many from the French and German banking and insurance industries, attended a meeting in Rome to discuss the proposal from French banks, centred on a voluntary agreement to extend half of the debt maturing over the coming three years into new 30-year bonds,” the paper reports.

These efforts are part of what the media and economists call “Plan B” for Greece. This second set of solutions have been explored because the Greek parliament may turn down long-term austerity plans which involve the systematic sale of national assets and raising taxes. Alternatively, a rescue package which does not have participation from banks could be judged a default which would trigger an avalanche of bank and insurance firm losses and the financial ruin of Greece. This could cause its expulsion of the southern European nation from the Euro zone.

The rescue of Greece is often compared to that of several South American states two decades ago. The important difference between the two cases is that credit default swaps were in their infancy then. The CDS market is now well into the trillions of dollars and institutions which have gambled on the future of Greece’s debt could be wiped out if it defaults.

If a 30-year extension of debt is not a technical default, it is hard to say what is. Economic research has some chance of analyzing what may happen to the finances of Greece or most other nations over three years. Predicting what will happen to its creditworthiness, deficit, and GDP decades from now is impossible.

Greek debt could become like 30-year mortgages in a difficult US housing market–risky and unpredictable.

Douglas A. McIntyre