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where these new bonds are probably booked by
most banks at par value. This would not be to the
general interest of Euro zone governments.
A second Greek default against private creditors
would also further jeopardize the “risk-free” status
enjoyed by sovereign Euro zone bonds. This
would increase the possibility of contagion to
other markets, devastating all efforts to restore
confidence on the Euro zone sovereign bond
markets.
The only scenario in which a new default against
private creditors would incur sanctions “is one in
which Greece exits the euro”. It should be noted
that Greece, whose life-support is a Euro zone
escrow account, does not any more have the fis-
cal sovereignty to declare such a default on its
own.
Breaking the taboo about risk free sovereign
bonds has raised fears of irreparable damage to
the Euro zone's debt markets, also leading to a
rise in the cost of capital. However, Euro zone
leaders claim that they are determined to restore
the pre-PSI status quo regarding European gov-
ernment bonds.
Ironically, the Euro zone leaders’ persistence on
involving the private sector in Greece's restructur-
ing exercise may have created a self-fulfilling
prophecy in regard to the loss of “risk-free” status
for sovereign debt.
Markets would rather not give too much thought
on such complex issues. They prefer analyses
derived from market practices regarding the “risk-
free” label, or prepared by credit agencies that
have generously granted AAA-ratings. This saves
the markets from the trouble of making their own
risk assessments.
The “risk free” status that accompanied sovereign
bonds for many years provided markets with a
deceivingly convenient benchmark for pricing all
kinds of financial assets.
“Eliminating the sacrosanct risk-free status of
their debt”, says Mr. Kirkegaard, “has exposed
Euro zone leaders to the markets’ myopia and
simplistic understanding of Euro zone politics.”
Greece's PSI scheme, in conjunction with Anglo-
Saxon stereotypes about the 1930s in Europe
and the creation of the ultra-conservative Tea
Party in the US, have all fed into the financial mar-
kets’ crying wolf about the Left's ascent to power.
“The wolf remains off in the distance, if it exists at
all”, estimates Mr. Kirkegaard. The ballot-box will
show who is right and who is wrong.
Trade with Greece
37
A second Greek
default against pri-
vate creditors would
also further jeopardize
the “risk-free” status
enjoyed by sovereign
Euro zone bonds.
”
“