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Fitch Regards Haircuts on Greek Debt as Default

The entire Eurozone crisis deal is predicated on the haircuts Greek creditors will take being voluntary. If the haircuts are seen as a default event, it would trigger certain credit default swaps, which since we actually don’t even know who holds what in that regard (!), would be wildly unpredictable and dangerous.

So one of the rating agencies saying that they will interpret the deal as a Greek default is big news.

Fitch said that despite the deal, Greece would still have a large amount of outstanding debt and that the country’s growth prospects remain weak. The ratings agency said the deal would constitute a default for Greece.

In afternoon trading Friday, the euro fell to $1.4158 from $1.4216. On Thursday, the euro hit a seven-week high of $1.4246 after European leaders announced that they had reached a deal to contain the region’s debt crisis.

I think investors were so thrilled to have any kind of deal announced that they massively oversold its effects. If the haircuts constitute a default, it’s nearly impossible to institute them without wreaking financial havoc. And that may be the most stable part of the deal, since we have no idea how European banks will achieve the necessary recapitalization or how the EFSF will raise the money needed to bolster its fund against the risk of skyrocketing Spanish or Italian debt yields.

This is why Kenneth Rogoff sounds right to me when he characterizes this deal as only a waystation to an eventual euro breakup.

European leaders’ agreement to expand a bailout fund to stem the region’s debt crisis only buys time as Greece will likely still leave the euro in the next decade, Harvard University economist Kenneth Rogoff said.

“It feels at its root to me like more of the same, where they’ve figured how to buy a couple of months,” Rogoff said as a compensated speaker at the Bloomberg FX11 Summit in New York yesterday. “It’s pretty darn clear the euro does not work, that it’s not a stable equilibrium.”

Yep. And with the latest news, it could be that imagining the deal to buy two months is wildly optimistic.

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David Dayen

David Dayen

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