haircut (Photo: striatic, flickr)

haircut (Photo: striatic, flickr)

The New York Times is reporting on the EU agreement on sovereign debt.

The quick summary is a “voluntary private bank only 50% haircut on Greek debt owned by private banks ” that is really a maximum (because private banks can opt out) of 28% on all Greek debt as Germany has protected EU, IMF, and German state loans to Greece from any haircut. The 28% haircut is supposed to lead to a 120% of GDP Greek debt in 2020, if you believe the German projection of Greek economic growth despite austerity and despite the Greeks being stuck with a massively over valued currency to try to use for their exports.

In addition the bond default protection collection of promises of funds that is the second part of the plan – no real funds mentioned – is now up to $1 trillion euros, with plans to use those promises in a special purpose vehicle (shades of the US’s off balance sheet accounting that led to the disaster of 2008) that will convert the current promises of bond protection into a partial protection of 5 times as many bonds – welcome to the mother of all CDOs.

So an economy driven into recession by austerity measures is supposed to shout with joy and say no to just defaulting, because it wants more German forced austerity measures and a future of a constant recession that lasts for the next 20 years?

Greek debt is now trading at 40 percent of face value, so assuming Greece would repay at 40% of face value after default, the Greeks now have only a 28% write off rather than 60%.

The third and final part of the program is a bank recapitalization plan of $147 billion by the end of next June — with individual countries doing a “TARP” to get the capital to the banks if the private sector will not come up with the money.

I assume that by the Group of 20 summit meeting on Nov. 3 and 4 in Cannes, France, we will know a bit more about how, or if, those promises on $1.4 trillion will be turned into actual cash. Italy’s “agreement” to the above was tenuous because of resistance in Italy limiting to Berlusconi to only presenting a promise to promise – a “letter of intent”. Seems the EU’s desire for Italy to reduce its debt and find a way to get economic growth is not an easy sell in Italy.

Greece, Ireland and Portugal default risk is only “priced” at $200 billion, so the rest of the fund is for others – meaning Italy at the moment. China is talked about as a contributor to the fund (!) but I expect any Chinese contribution will be via the safer IMF route.

But at the end of the day the question still is, for the Greeks, what do you get by going with Germany’s 28% haircut (max) and decades of recession and austerity, rather that a 60% haircut via default.

I wonder if any of the Greek students that are rioting have any training in economics, and if so, what their reaction will be?