Greek Rescue Deal: Bondholders Take 50% Loss

European leaders hammered out the details of their rescue plan for Greece this morning, to the relief of markets fearful of a total implosion.  The European Union deal prevents that, or at least forestalls it, but some bondholders are probably feeling rather imploded right about now, as the Associated Press reports the deal involves handing them a 50% loss on Greek bonds:

After a marathon summit, EU President Herman Van Rompuy said that the deal will reduce Greece’s debt to 120 percent of its GDP in 2020. Under current conditions, it would have grown to 180 percent.

That will require banks to take on 50 percent losses on their Greek bond holdings — a hard-fought deal that negotiators will now have to sell to individual bondholders.

Van Rompuy also said the eurozone and International Monetary Fund — which have both been propping the country up with loans since May of 2010 — will give the country another euro100 billion ($140 billion). That’s slightly less than amount agreed in July, presumably because the banks will now pick up more of the slack.

So holding Greek government debt down to 120% of GDP is a great achievement, and all it took was getting the folks who financed that reckless government spending for years to swallow a 50% loss in value on their holdings.  That’s the kind of financial “haircut” that ends with a slide down to Mrs. Lovett’s meat pie shop.

Greece is a very advanced example of fiscal disease that the rest of the developed world should not flatter itself into thinking it’s immune to.  Insane spending levels turned Greece into an insolvent disaster… and when the day came that even the merest pretense of a functioning government was impossible, they turned to the larger financial entity their economy was connected to, the European Union.  The EU couldn’t afford to let Greece detonate, for a variety of reasons (not least of which are the shaky situations in Spain and Italy) so some kind of bailout was inevitable. 

It’s a story that will be repeated, with various permutations, in state and local governments throughout America during the years ahead.  It’s always crazy to talk about even the most reasonable fiscal restraint until doomsday arrives, at which point the rest of the country will be presented with irresistible bailout demands.  Today, Governor Kasich’s collective bargaining reforms are in trouble on Ohio ballot initiatives; tomorrow, when Ohio implodes from lunatic union demands, every national officeholder will be told they have no choice but to bail it out.  The notion of allowing Ohio to suffer the consequences from its earlier irresponsibility will be dismissed out of hand as unthinkable.  You’ll hear modified versions of the same arguments tossed around the European Union with respect to Greece for the last few years.

Obviously, banks and investors who have been buying Greek bonds for years never expected they’d be asked to swallow a 50% loss.  There might have been few other good options on the table… but responsible government involves the restraint and foresight to avoid sitting at that sort of table.  This is delayed-action wealth redistribution on a massive scale.  Government bonds are supposed to be stable investments, although certainly latter-day investors in Greece knew they were taking some pretty big chances.  Today’s rescue package makes swindlers of the Greek government.

European Commission President Jose Manuel Barroso declared, “These are exceptional measures for exceptional times. Europe must never find itself in this situation again.”  What makes him think it won’t?  Greece has been rocked by a general strike and violent riots to protest austerity measures, including pension cuts and tax increases.  They were tossing firebombs outside of Parliament last week, and somebody got killed.  The enduring tragedy of Greece will unfold through a populace ruined by decades of socialism, which views debt at 120% of GDP as unbearable austerity.