Eurozone: Return Of The Visigoths

Reading the newspapers this morning, you might get the impression that the European monetary crisis had somehow been resolved by the standard overnight marathon meeting of the Union’s financial ministers.

You might get the impression the banks are all safe.

European Union

You might get the impression Greece’s debt has been massively reduced.

You might get the impression Italy is no longer about to implode.

You’d be wrong.

The Euro has been given a reprieve of, perhaps, a month but that’s about it. Greece will eventually default on its loans, and Rome will burn like the Visigoths have returned before long.

If I had a mortgage of £100,000 and only offered to pay my bank back £50,000 of it, my bank would declare that I’d defaulted and would take back my (extraordinarily cheap) house. But because Europe asked the banks to do the same thing for Greece, this isn’t according the EU at least, a default. It’s just a mere ‘haircut’. Oh how I loathe that term.

If I went for a haircut and the barber removed half the hair on my head, I’d be more than slightly annoyed at him. Even describing it as a ‘severe haircut’ doesn’t do that justice.

Anyway, to get out of the barber’s chair and back to the fiscal meltdown, European finance ministers are desperate to avoid a Greek default, even if that means completely redefining your definition of the term. That’s because lots of people have taken out insurance against such a default in the form of credit default swaps.

A technical default would mean the financial institutions holding those credit default swaps would have to pay them out. That doesn’t sound so terrible until you realise that there’s no single database of who has sold credit default swaps and who’s bought them. So no analysts can tell you just how big a payout a default would cause.

So a default would cost the financial institutions and European governments a fortune in money loaned to Greece that will never be repaid. But they could also lose a second fortune in paying out on credit default swaps.

Bad times for Europe and yet more overnight marathon meetings await George Osborne, David Cameron and their counterparts on the mainland.


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