Tag Archives: eurozone crisis

Suggested Articles (09/03/12)

  1. Welcome…to the World of Failed NationsDaron Acemoglu, James Robinson – following the release of their new book Why Nations Fail in the UK, I thought it would be appropriate to also introduce their new blog, covering themes from the book itself. More specifically they talk about various examples of how extractive institutions have been the main cause of failed nations.
  2. Too Big to Jail: Simon Johnson – having only just recently watched the film Inside Job, I came across this interesting article following on from the themes of the film, about corporate fraud and criminality within some of the biggest banks that were involved in the financial crisis. An interesting play on the “too big to fail” argument, whereby banks have an incentive to take on excessive risks. The “too big to jail” view describes how banks can also get away with just about anything if they are big enough.
  3. A Devaluation Option for Southern Europe: Gita Gopinath, Emmanuel Farhi, Oleg Itskhoki – an clever suggestion on how Southern European countries can effectively create the same effects as devaluation, without the need to actually leave the Euro and readopt their old currencies. In my opinion it definitely seems like a viable idea. What the Southern European countries need most now is to increase their competitiveness and show signs of growth, as opposed to imposing austerity measures. Only once their economies begin to grow again, will they be able to fix their balance sheets.
  4. Jeremy Lin and the Political Economy of Superstars: Kenneth Rogoff – an interesting discussion on why we accept high pay for sports superstars, but on the other hand do not tolerate the high bonuses of financial superstars. In my opinion this is a very fair point to make, but the question that remains is, should we accept high pay for both or not tolerate either? I’ll leave that for you to decide.
  5. Where to Wait for an Elevator: John Cook – finally, just a fun bit of optimisation theory for when you are next waiting for an elevator. Enjoy!
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Celebrating The Greek Credit Event

Finally, the ISDA (International Swaps & Derivatives Association) has decided today that a restructuring credit event has occurred in Greece.

Has there not already been restructuring of Greek debt?

It is true that there have already been write-offs by holders of Greek debt, however, a restructuring credit event occurs when restructuring is involuntary. Surprisingly the debt write-offs were previously considered to be “voluntary”, even though this required a lot of convincing of private creditors. Today though, the Greek government announced that it will activate its Collective Action Clause on Greek bonds.

What does the Collective Action Clause (CAC) mean?

The CAC is an agreement that if a certain percentage of Greek debt holders agree to a write-off, the remaining debt holders can also be forced into writing off their part of the debt. Since this clause has now been activated, the restructuring is no longer voluntary, and so a credit event has occurred.

So why should we be happy about a credit event having occurred?

The good thing about the restructuring finally being considered a credit event, is that any insurance that was purchased by private sector creditors and governments would now be triggered. Many holders of Greek debt had purchased Credit Default Swaps (CDS) in case Greece were to experience a credit event, and now that one has occurred, the CDS have finally been triggered and creditors receive their payments.

What if the restructuring had not been considered a credit event?

If a credit event had not occurred and CDS payments had not been triggered, many private creditors would have possibly begun to wonder as to whether there was any use for CDS at all. After all, if Greece’s debt restructuring isn’t considered a credit event, then what is? As a result, CDS agreements would have been deemed worthless, causing both private creditors and governments who hold CDS, to write off their value and possibly land in even greater financial trouble.

So there you go, there’s a part of Greece’s failure that we can finally be happy about.

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