Monday, June 6, 2011

"Extend and Pretend" Comes to Greece

Members of the European Union are moving closer to a plan that will extend the debt maturities of Greek private debt (that is, debt owed to the private sector, mainly banks). This is more wishful thinking. Extending the debt in a package that involves more austerity is a prescription for more pain and no gain. Long run, this cannot work.

The Greeks are way overextended. Short of some kind of substantial default, Greece has no hope. Extending maturities is a "mild" default. Greece needs a real default. They need to offer bondholders 15 cents on the dollar for their outstanding debt -- take it or leave it. Merely extending debt maturities is too little too late.

The reason that the EU is not moving forward with true restructuring (meaning a much more drastic default than mere debt extension) is that they have orchestrated earlier bailouts using the private sector and the EU is reluctant to turn around a year later and demand that the buyers take an immediate haircut. So, they temporize.

The outcome for Greece is going to be a major default at some point. It is far better to do it now, not later. It is better for creditors, it is better for Greece.

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