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Wednesday, October 26, 2011

EU Agrees on deal; bondholders get screwed

Leaders of the EU countries plan to leverage the region's 440 billion euro ($609 billion) bailout fund to 1 trillion euros. The fund is known as the European Financial Stability Facility, (EFSF) and currently has between 250 billion to 275 billion euros left-over after bailouts for Greece, Ireland and Portugal. The plan is to leverage the fund by around four times through a special investment vehicle and a debt-insurance plan.  Excuse me?  Isn't this how we got into trouble in the first place?  


Okay, I just had to get that out of my system.  What are these people thinking??

The other key announcement out of the Euro-zone summit was that private holders of Greek bonds will take (be forced to take) a 50% write-down on the value of their Greek bonds, which will save Greece 100 billion euros - great for Greece, not so great if you are a bank or individual holding these bonds.  

This outcome was baked in the cake - we knew it had to happen, but the result is a structural default on the part of Greece.  We can only hope that these measures, as ill-conceived as they may be, will be enough to deflect attention away from Greece, at least int eh short-run, so we can get back to focusing on our own, very significant problems here at home.

I don't see how Greece will ever be able to pay-back the money they have borrowed, either from private investors or from the EU bailout.  Even the most optimistic estimates don't show them balancing their budget for many, many years.  I serious doubt they will ever get there, much less have the money left-over after paying their regular operating expenses to pay-back hundreds of billions of euros in debt.  The only positive I can draw from this situation is that I was unlucky enough or foolish enough to loan them any money.

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