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The Bond Market Makes Its Move in Greece

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The news that Standard and Poor’s, a rating agency, will not sign off on the proposed Greek debt deal shows a dysfunction in the modern international financial system, and all of its competing claims. You have a country, Greece, which needs to restructure its debt. The set of countries in the European Union that’s backing Greece financial has signed off on the deal. A number of banks in France and Germany have given their blessing, and they’re the creditors. They have signaled that they would restructure the debt. But S&P, a rating agency paid in part by those who made deals on credit default swaps, says that they will view such a transaction as a default event, which would trigger those CDS.

European efforts to encourage private investors to contribute to a new international bailout for Greece hit new problems Monday when the Standard & Poor’s rating company said the leading proposal under consideration would likely bring the country into default.

The comments from S&P are the first reaction from a rating company to a preliminary plan that emerged last week from French banks—the biggest foreign holders of Greek debt. The plan aims to encourage holders of Greek government bonds maturing between now and 2014 to roll over as much as €30 billion ($44 billion) into new Greek bonds. That would lessen the amount of new money that other euro-zone governments and the International Monetary Fund would need to lend to stave off a new Greek payments crisis.

The S&P assessment was that the French plan would leave participating bondholders worse off, and therefore would probably lead to Greece being declared in “selective default,” indicating that the default applies to only some of an issuer’s bonds.

So S&P is enforcing the boldholder’s financial commitment, in essence, by refusing to play along with a transaction between two sides of a deal. The third party which has just placed a bet on the deal on the side has veto power over what those two sides do. That’s really what we’re saying here.

CommunityThe Bullpen

The Bond Market Makes Its Move in Greece

The news that Standard and Poor’s, a rating agency, will not sign off on the proposed Greek debt deal shows a dysfunction in the modern international financial system, and all of its competing claims. You have a country, Greece, which needs to restructure its debt. The set of countries in the European Union that’s backing Greece financial has signed off on the deal. A number of banks in France and Germany have given their blessing, and they’re the creditors. They have signaled that they would restructure the debt. But S&P, a rating agency paid in part by those who made deals on credit default swaps, says that they will view such a transaction as a default event, which would trigger those CDS.

European efforts to encourage private investors to contribute to a new international bailout for Greece hit new problems Monday when the Standard & Poor’s rating company said the leading proposal under consideration would likely bring the country into default.

The comments from S&P are the first reaction from a rating company to a preliminary plan that emerged last week from French banks—the biggest foreign holders of Greek debt. The plan aims to encourage holders of Greek government bonds maturing between now and 2014 to roll over as much as €30 billion ($44 billion) into new Greek bonds. That would lessen the amount of new money that other euro-zone governments and the International Monetary Fund would need to lend to stave off a new Greek payments crisis.

The S&P assessment was that the French plan would leave participating bondholders worse off, and therefore would probably lead to Greece being declared in “selective default,” indicating that the default applies to only some of an issuer’s bonds.

So S&P is enforcing the boldholder’s financial commitment, in essence, by refusing to play along with a transaction between two sides of a deal. The third party which has just placed a bet on the deal on the side has veto power over what those two sides do. That’s really what we’re saying here.

Masaccio has tackled this as well, but it’s really extraordinary, and brings up a host of other questions. After playing a central role in nearly destroying the financial system, the rating agencies have emerged unscathed and just as powerful. If they decide that a deal cannot go through, they can impose with just a short missive enormous constraints on that deal. What does this mean for the corrupting influence of these agencies? What does it mean that sovereign countries have to pay this much attention to the whims of the bond market? What does it mean that bondholders collectively have this much power to bring the world to heel?

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