Our discussions on matters
economic with a senior figure in the insurance industry raised an intriguing
question recently. It is this: in relation to the difficulties that have beset Greece and its
relations with the ECB and the IMF, and given that the Greek government has
already missed a scheduled payment to the IMF, how would a default in this
instance be defined?
There have been many defaults
by countries, but the most significant one in the recent past was when Russia refused
or was unable to honour its commitments to the holders of its sovereign bonds
in 1998. In that case it was adjudged to be in default, and that judgment call
was made by the international rating agencies.
Machiavellian machinations in the ECB
The famous (or infamous)
medieval political observer, Niccolo Machiavelli, wrote in his major work, “The
Prince”, that anything can be rationalised after the event, provided always
that the parties to it are able and willing to carry it out. There is evidence
that the brinkmanship being indulged in by the Syriza government in Greece,
where it is depending on the unwillingness of the leaders and other members of
the Eurozone to allow the precedent of a member leaving the union, could well be
based on a pragmatic understanding of the situation. But where is the rule that
says a member state must leave the Common Currency because it has failed to
repay a loan to the ECB (and Mario Draghi is always adamant that his
organisation is a rule-driven one)?
The real sanction that the
central bank has to hold against Greece
is the advancement of new funding, which it has been withholding pending Greece fiscal
reforms. However, it has been withholding those funds for over a year, and
there is no reason why it cannot continue to do so.
The ECB, the EU Commission
and the core EU states, of course, are walking a tightrope of their own,
because any perceived concessions to Greece will almost certainly
trigger disruption in other Eurozone states.
A lot will depend on the
rating agencies. Already, it has been suggested that unpaid loans to the IMF
and the ECB, which can hardly be described as normal bondholders, could be
outstanding for quite some time before S&P, Moodys and / or Fitch would
call a default.
And it might be instructive
to remember that the above mentioned Machiavelli was a countryman of the ECB
president, Mario Draghi.
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