The rumors and the scenarios about a 50% ” Haircut” of the Greek debt and an “orderly default” , call it also “controlled bankruptcy”, keep whirling around the heads of ten million Greeks causing increased uncertainty and depression. With the tax hikes and the income decreases, the Greek household have already have started experiencing a so-called ‘internal devaluation’ as Greece’s participation in the euro zone makes a currency devaluation impossible. I found for you, Greeks or Foreigners living here, a 10-Questions-&- Answers Guide as published by the Greek Sunday newspaper Real News. More or less, the answers are the same in all Greek media. However there are no guarantees as there are always the ‘unforeseen factors’!
10 QUESTIONS&ANSWERS to HAIRCUT & CONTROLLED BANKRUPCTY
With the Greek economy is on the knife’s edge and Europeans speaking openly now about the possibility of Greece controlled bankruptcy through a tough debt restructuring, Real News put 10 questions to economists and market players in order to map the new environment it will occur and the consequences of this act for the country and Greek citizens. 1. How does a controlled bankruptcy take place? The plan claims the “clipping” of the Greek debt by 50%, that will delete the debt by 170 billion euro. The positive for the country, unlike the instant death of an uncontrolled bankruptcy, is that the procedure will be done under the complete control of the institutions of the eurozone. 2. Who will lose with the 50% haircut and the controlled bankruptcy? The banks within and outside the Greek borders and the insurance funds. Essentially, they will suffer damage equal to 50% of the value of held bonds. The losses are real, ie they must pass on their balance sheets and both banks and funds will need support of multi-billion euro. Under the plan, support will come from the funds of emergency eurozone Liquidity Facility (EFSF), banks will be recapitalized as will the pension funds. 3. What are the benefits for the Greek government? Greece will owe half of its debt, thereby there will be a significantly reducing of interest rates, repayments and the debt will be manageable. If, indeed, the economy produce a surplus, then it is possible to reduce also part of the capital. 4. What will be the price for this transaction? For a controlled haircut 0f 50% within the euro, the price the citizens of Greece will pay is a 50% devaluation of their living standards. The process has already begun and will be reflected accurately in the Memorandum 3 [currently in negotiation between Greece and IMF/EU/ECB lenders]. In essence, the debt reduction will not be equal to GDP, so our living standards will fall in the potential of the country’s GDP. 5. What impact will have on wages and pensions? The first step was made possible with the announcements of the last austerity measures last week. Salaries and pensions will be reduced to 50%, and so will the public sector. The pension funds will be supported by the EFSF and their number swill be drastically reduced. 6. What about bank deposits? Controlled bankruptcy within the euro guarantee deposits, as banks will pass the scrutiny of the European Support Facility (EFSF), will be recapitalized and there is no fear for bank deposits. 7. What about loans?
While wages will be reduced to 50%, the loans will remain the same, according to the prior financial situation. Banks, however, in concert will be invited to enter into arrangements even knowledgeable loans, reducing the amount of monthly installment repayment and extension of time in order not to be affected by the inability of borrowers to pay their installments.
8. What will happen to property prices?
According to economists, after completion of controlled bankruptcy, there will be a significant drop in property prices. It is not excluded that the prices will fall also at 50%. And because in the crises there are hidden opportunities, those having cash money can buy properties at low prices. The contradiction is that while the majority of owners has acquired property with mortgage loans, they will see the property values fall while the loan will be much higher.
9. What will happen to prices of products and goods?
The market estimate that would align with the standard of living of theconsumers. The decrease in salaries and pensions will automatically lead to a corresponding reduction in consumption. “However, as companies adjusted based on profit, so they will inevitably move to lower prices, so many can survive,” stated characteristics.
10. What is the impact on retail?
Numerous small and medium enterprises is not expected to endure. Already tens of thousands of small businesses have closed and the phenomenon is expected to continue. The reduced living standards will have a drastic impact on retail. Only large chains will survive because they’re able to offer attractive prices.Source: Real News /Text in Greek
According to national the international press there is a period of five to six weeks for this plan to be concluded. So make your arrangements, accordingly.
PS What an awful perspective! I wish, I had left the country …. yesterday!
Good post on effects of 50% default but there is something not logical with this scary ‘Guide’.
4) and 6) in particular needs questioning
It claims that by reducing debt by 50% GDP (living standards) will also fall by 50%. So, debt per cent of GDP is exactly the SAME as before. Economy has the same ability to pay – how can this be called debt relief? Still in a debt trap – shrinking economy, no growth.
4) says ‘the price’ the citizens of Greece will pay is a 50% devaluation of their living standards’. If true, then expect everyone to run for the euro exit (thought the walls if necessary). It assumes the same logic of “internal devaluation” / austerity measures which are not exactly working. The ‘price’ citizens will pay ( and why should they? What exactly are they buying?) would have to be enforced. Not possible – great political instability.
It is also is an accounting viewpoint that we need to be careful about. Income per capital is not always the same as the living standards of ordinary people. Lump into this statistic are all those not lucky (or unlucky) enough to hold bonds and wealth, etc. Effects are not distributed evenly.
As for wealth reduction, I would not trust the idea of a German ‘Treuhand’. It was supposed to sell off state property at a profit but closed its books with a huge deficit and a legacy of bitterness among the legions of workers whose jobs it destroyed.
‘Four million Germans were employed by Treuhand-owned companies in 1990 but only about 1.5 million jobs were left in 1994 when the agency closed. Instead of reaping profits to be distributed to all east Germans, as it was designed to do, it ran up debts of 270 billion marks ($172 billion) in the fire sale of assets.’ (http://www.reuters.com/article/2011/07/03/us-greece-juncker-idUSTRE7620ZK20110703)
6) What about bank deposits? Great, if it works.
But how can the European Support Facility (EFSF) guarantee this as well as deposits in Spain, Italy etc. Are they invent a bigger version of Lehmans? Paper on paper on paper …… trying cover up the cracks
7), 9) and 10) Ignores the structural problems of the economy. For example, local monopolies and cartels. Remember, the reason why internal devaluation is not working.
8) Not clear, depends on the rest of the world. Lots of nice cheap assets already going for sale.
Basically, the guide is trying to sell the idea that default in which the creditors can pass all costs to the population is the only choice.
Will bank go bankrupt???
it claims No….