Why It's Actually A Big Deal That Greek Bond Haircuts Talks Have Been Suspended

Greece Protest

Photo: AP

Talks on the losses private Greek bondholders will take are deadlocked and have been suspending.This news just hit the wires from Bloomberg. So far, U.S. markets don’t seem to care.

However, this could be a big deal, for two reasons:

– Debt sustainability in Greece is virtually impossible without significant writedowns of sovereign debt. The numbers are just too big to allow for anything else. More private sector involvement (perhaps coupled with public sector involvement) is seen as absolutely necessary at this point. Don’t forget that this will probably be followed with some level of bank recapitalization.

– Market chatter is that these haircuts could end up being involuntary. While we’re not sure exactly what this might do, the concern is that involuntary PSI could trigger a credit event. This would have massive implications not only for Greece but for the global economy because it could trigger the fulfillment of credit default swap contracts. Who knows how far these implications would extend?

Meanwhile, everyone’s still waiting on that letter from Berlusconi.

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