What You Saw Today Was Basically Europe's Worst Nightmare Playing Out

grim reaper death

Photo: Wikimedia Commons

Now you know. Now you know why for so long, everyone in Europe promised massive destruction if any private bondholders had to take a haircut on their sovereign debt holdings.This is the avenue through which The Contagion spreads.

It started yesterday when Moody’s made an extremely important point: The French bailout plan for Greece, which would see bondholders take a haircut disguised as a rollover, represents a new stage in the bailout process. From now on, the expectation is that private bondholders take losses.

And so with that expectation, the debt of every country is now riskier than it was before, because whatever “EU put” you got with each bond before is now gone. Sure, you might still be bailed out, but you’re going to at least have to pony up a bit of your own cash to get that.

And so, in light of that reality, peripheral debt all went ka-blamo today, especially Portugal’s, though also Italy’s.

Even though the Greek debt rollover plan hasn’t even been implemented yet, it’s probably too late to reverse the impact. Private bondholders are on the hook. Buyer beware.

See also: The latest odds on European sovereign defaults >

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