Europe Should Be Applauded

After months of uncertainty around the rescue plan for Greece, it’s a relief to see the euro zone leaders come together and agree on a rescue plan for the struggling country. Europeans officials have confirmed that a €109 billion aid package is underway. In addition to this, financial institutions that currently own Greek bonds will contribute €50 billion through 2014 through a combination of debt extensions and the discounted purchase of these Greek bonds on the secondary market. What is important to note is that this will still constitute as a “selective default” by the rating agencies. A “selective default” is used to describe when the terms of a bond are changed (either in rate or term – in this case it looks like both because the maturity of the existing bonds will be pushed from 7.5 years to 15 years and rates will be set to 3.5%). The European Central Bank (ECB), an active money lender to European governments, previously warned that even a “selective default” would prohibit the ECB from lending to Greek banks, due to collateral issues (essentially expressing an unwillingness to blindly lend money to weak financial institutions that are in default). However, it appears as though the European governments are willing to guarantee any defaulted Greek debt offered as collateral at money market operations, which would ensure that the ECB was covered in a worst case scenario (i.e. if Greek banks are not able to repay the ECB back, in which case the European governments – through their guarantee – would be on the hook). That the Euro leaders came together and crafted this plan should be applauded and perhaps a wake-up call for leaders in the U.S.