Daily Archives: March 7, 2012

A myth is developing that private creditors have accepted significant losses in the restructuring of Greece’s debt; while the official sector gets off scot free. International Monetary Fund claims have traditional seniority, but bonds held by the European Central Bank and other eurozone central banks are also escaping a haircut, as are loans from the eurozone’s rescue funds with the same legal status as private claims. So, the argument runs, private claims have been “subordinated” to official ones in a breach of accepted legal practice.

The reality is that private creditors got a very sweet deal while most actual and future losses have been transferred to the official creditors.

Greece’s private creditors should stop complaining and accept the deal offered to them this week. They will take some losses, but those losses are limited and, on a mark-to-market basis, the debt exchange offers them a potential capital gain. Indeed, the fact that the new bonds are expected to be worth more than the old bonds suggests that this PSI exercise has further transferred losses to Greece’s official creditors.

The reality is that most of the gains in good times – and until the PSI – were privatised while most of the losses have been now socialised. Taxpayers of Greece’s official creditors, not private bondholders, will end up paying for most of the losses deriving from Greece’s past, current and future insolvency. 

As Barack Obama and Benjamin Netanyahu discuss next steps regarding Iran, investors are becoming increasingly jittery. At one point late last year, the Brent oil price had dropped back towards $90 per barrel. Now, it’s well above $120, reflecting both renewed economic optimism and fears over how, precisely, Iran’s nuclear ambitions can be contained.br />
There is, however, more to the story than just Iran, important though it is. Oil prices have been steadily rising since the beginning of the millennium, a remarkable turn of events given persistently-disappointing growth rates in the developed world. In the past, US economic weakness would have been associated with falling oil and other commodity prices. Not any more. Oil prices – and other commodity prices – are increasingly determined by burgeoning demand in China, India and other fast-growing emerging nations.br />
Oddly enough, the west’s pursuit of quantitative easing may simply have hastened this process. With western households and companies busily deleveraging and with investors still on a quest for yield, the benefits of loose monetary policy have increasingly flowed to the more dynamic parts of the world. The recent increase in oil prices reflects not only the impact of Iran but also misjudged attempts by western policymakers to kick-start their own economies.