The horror… the horror… | FT Alphaville

The horror… the horror…

We’re slightly late to this, but nevertheless, Monday’s statement by Christian Noyer, governor of the Bank of France and a member of the European Central Bank’s governing council, on the ‘horror’ of a Greek debt restructuring is well worth a read.

He sets out the ECB’s view of why a restructuring means default and what dire consequences would follow.

Via Bloomberg (emphasis ours):

If we restructure Greek debt, that means Greece defaults.

And what are the consequences of a default? The banks with the most Greek bonds are Greek banks. The Greek banks themselves will be badly damaged. When the banking system is stricken, what do you have to do to prevent the financing of the economy from collapsing? You have to recapitalize the banks. Who will recapitalize the Greek banking system? The Greek state.

That means the Greek state will gain nothing. It will invest in the banking sector everything that it has gained in the restructuring.

Next there are the Greek insurers and pension funds who will be hurt.

That means it will weigh on the Greek population’s savings, which could cause a drop in consumer spending and Greek growth will take a hit. This counters the Greek recovery.

Then, what else is there in terms of Greek creditors? There’s the European public sector, European governments and the central banks. This is directly tapping the European taxpayer.

If we make European states pay, the mechanism of European financing will stop immediately. The states will not continue putting their taxpayers’ money on the line when their loans have just been cleaned out, when they’re taking losses on the money they’re lending. So that’s the end of support from other European states.

And for the central banks, what happens? Greek debt will become debt that is no longer worth anything. It’s no longer debt that can be considered as sufficiently safe for operations in the Euro System. That means by definition that to restructure is to become ineligible as collateral. If it’s ineligible, then it means a large part of what the Greek banks bring as collateral for refinancing can no longer be used. That means the Greek banking system can no longer be financed.

The next day what happens? Greece needs to find investors because the Greek state won’t move from deficit to surplus overnight. As long as it doesn’t have a primary surplus, the Greek state needs to borrow. International investors, that small group that remains, have just been restructured. It’s not the next day they’ll come back with financing.

The Euro System won’t refinance. The European states won’t finance. The IMF won’t go there alone. No one will finance the Greek state in coming years. That means the meltdown of the Greek economy. This is a horror story. That’s why we’re against a restructuring.

Seems Nouriel Roubini thinks differently…

Related links:
Greek bank risk — another New Europe tour – FT Alphaville