This morning it was unveiled that the Greeks and the European authorities are at the final stages of a bind swap deal with the private sector. The deal is meant to ensure that the private sector will suffer a reasonable loss whilst the ECB and any other central banks will not suffer any.
The fact that they are forcing the losses on the private sector is in my eyes a deserved punishment. The problem with the PSI procedure is that it doesn’t reward these economic agents accordingly. This PSI example means that in the future if another government bond crisis occurs again then private investors are far less likely to provide support to troubled governments, and the pesky bond vigilantes are rewarded once again. Investors are then going to short a country’s debt at the very point in time when it needs confidence and buyers. So should this happen again, it could happen a lot quicker.
From a fund/bank/insurance company/pension firm that is going to get scalded for owning Greek debt, will be thinking this: “the investors which were short made money, legal powers are guarantee authorities will endure no damages whilst I’m taking a slap?”. The next time this happens instead of buying it when its cheap and assuming that it will get resolved, you may want to get short or use other derivative instruments to go short of the country.
The vigilantes will feed well, the authorities will not eat less, and the private investor will waste away.
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