The Economy and the Greek debt swap deal
CNBC – Stocks closed sharply lower Tuesday, with the Dow posting its first triple-digit decline in 2012, fueled by fears over a Greek default and amid economic growth concerns. The Dow Jones Industrial Average logged its biggest decline since November 23, 2011. … The CBOE Volatility Index, widely considered the best gauge of fear in the market, surged above 20 for the first time since mid-February. … The focus has since turned back to Greece as investors were jittery over the Greek debt swap deal. The bond swap plays an important role of a second bailout loan for the debt-ridden nation that aims to keep it from defaulting.
LA Times – Decision day for the Greek debt crisis is drawing near, and insiders are predicting that if things go awry it could cost the world economy $1.3 trillion. Holders of Greek bonds have to decide by tomorrow whether they will trade in their old Greek bonds for new bonds that are worth less. Bond holders have an interest in agreeing to the swap because if it doesn’t work, Greece is likely to default on its debt when it has scheduled payments on March 20.
In a confidential memo that has just surfaced, the industry group representing bond holders has said that the consequences of such a default could be $1 trillion in losses. “When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exit of Greece from the Euro Area, this financial shock to the [European Central Bank] could raise significant stability issues about the monetary union,” the International Institute of Finance’s memo said, according to a copy posted on a Greek news website.
Many of the bonds are currently held by hedge funds who bought them up on the cheap and who are now disappointed with the level of the cuts that Greece is insisting they take. The IIF put out a statement Monday listing all the bond holders who are willing to take the deal. Bloomberg estimated that they only account for 20% of the total participants needed.