Tuesday, July 12, 2011

Here we go again - European 3 card Monty

When is a default not a default? When it's a buyback!

The new, old strategy for dealing with Greece's debt problem is for the European Financial Stability Facility (aka taxpayer funded pile of money) to buy Greek bonds on the secondary market, then allow Greece to pay back less than the face amount of the bonds or "retire them at a discount".

This is really a variation on the "Special Purpose Facility" scheme in which a quasi-private entity is formed, which owns Greek bonds. The former bondholders are now shareholders in this entity and the entity is backed up by guarantees from the European Central Bank. In both scenarios, the end game is to relieve the bondholders (the folks who actually made the investments) from risk and instead, place the risk on European taxpayers (who had nothing to do with the bond purchase decisions).

To put the buyback program in perspective, let's say Bob and John are coworkers of yours. Bob owes John $100. It's beginning to look like Bob wont be able to pay it all back. Your boss steps in and buys the debt from John (so now Bob owes your boss $100). Then your boss tells Bob he only has to pay back $45 and takes the difference ($55) out of your paycheck.

Sound ridiculous? That's essentially what's being proposed. And if it works over there, they'll do it over here.

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