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Greece Could Hold the Cards: Credit Default Swaps Bigger Than Greek Debt

Yesterday, Greek Prime Minister George Papandreou survived a no-confidence vote without one defection from his Socialist party colleagues. As soon as today (though probably next week), they plan to pass an austerity, tax and privatization package that will secure them 12 billion euros in needed funding to pay off debt, which should be able to get them through the summer.

Papandreou and his party are not arguing that this plan to sell off state assets and cut the budget even more is a recipe for economic growth. They are not arguing that this will enable more Greeks to get jobs. They are only speaking the language of fear. Here’s a quote from the country’s Finance Minister:

“We must follow this course to save the country,” Finance Minister Evangelos Venizelos said, addressing lawmakers ahead of the vote, according to wire reports. “Distrust” that Greece won’t follow through on reforms “is something we have to change,” he said.

That’s it. Greece must sell off its assets and cut salaries for government workers, because they have to “save the country.” But are they really saving Greece through austerity? Are they saving Greece through selling it off?

No, they’re saving their creditors. In a revealing article, German Chancellor Angela Merkel explained the situation pretty well:

German Chancellor Angela Merkel is warning that a full-scale restructuring of Greek debt would have “completely uncontrollable”consequences on the financial markets.

Merkel said Wednesday that imposing a so-called haircut on Greek debt – reducing the amount to be repaid – would not only endanger banks and other creditors who hold Greek bonds, but also institutions that sold insurance policies against a default.

Merkel told a parliamentary committee that those credit default swaps have a higher face value than the debt itself.

In other words, a Greek default event would break the banks and the financial wizards who sold default insurance. This is all about protecting them, not the Greek people. To quote Atrios, “The people who run the world agree that ordinary people need to suffer so that the banksters don’t lose on their bets.”

Mohamed El-Erian of Pimco still thinks Greece will default. And maybe they will. Maybe the Parliament will succumb to the pressure of the street and refuse to institute more pain and suffering. Maybe this latest plan will just kick the can down the road, and default will be an inevitable future event. But Greece should have the power to set the terms here. It’s like the old joke: “If I lend you $100 and you don’t pay it back, you have a problem. If I lend you $1 trillion and you don’t pay it back, I have a problem.” Greece could hold that over their creditors, but so far their political leadership has been cowed.

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David Dayen

David Dayen