“Voluntary” Haircuts

01 Nov

Pictures of a Recon Haircut

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I remember hearing a Frank Sinatra album fifty years ago.  Between songs, Frank made some introductory remarks including a description about using “little pieces of plastic” in Las Vegas to pay for their rooms, dinners, booze, etc.  That was the first time I’d heard about credit cards.

Fifty years ago, everyone paid in cash or checks.  Credit cards were a mysterious rarity reserved for the super-rich.

Today, cash is a rarity and paying with “plastic” predominates.   In fact, we’re so habituated to paying with plastic, that most people can’t imagine life without credit and therefore live in fear of losing their almighty credit rating.

Dependence on credit ratings is not confined to individuals.  Even nations are so dependent on their credit ratings that they can be terrified by threats of losing their credit ratings.

For example, the current economic debacle in Europe is ultimately about the credit rating of the government of Greece.  Here’s an article from Bloomberg (“Greek Accord Won’t Trigger Credit-Default Swaps, ISDA Rules Say”) that implicitly touched on the Greek government’s desperate need to salvage its credit rating by compelling its creditors to take 50% “voluntary haircuts”:

“The European Union’s agreement with banks for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered.”

Greece is in debt for $500 billion.  So why is there such a fuss about whether a mere $3.7 billion in “debt-insurance” (Credit Default Swaps; CDSs) will or will not be “triggered” and paid?  $3.7 billion is a fraction of one percent of the $500 billion debt.  It’s a triviality.

And what difference does it make if the 50% loss ($250 billion) suffered by Greece’s creditors is voluntary?

“The International Swaps & Derivatives Association (ISDA) will decide if the credit-default swaps should pay out depending on whether it judges losses to be voluntary or compulsory.

Under the terms of the Credit Default Swaps, the creditors are insured against losses in the Greek government’s bonds—but only if those losses are forced upon the creditors.  In other words, if Greece expressly defaults and says “screw y’all,” its creditors will be compelled to accept the losses.   If the losses are compulsory, then the insurers who issued the Credit Default Swaps (CDSs) to Greece’s creditors will have to pay out $3.7 billion.

On the other hand, if Greece’s creditors can be “persuaded” to “voluntarily” accept a 50% loss in principal, the party that issued the CDSs won’t be obligated to pay out $3.7 billion to Greece’s creditors.

All this strikes me as extremely strange.  Who gives a damn about a CDS payout of $3.7 billion as compared to a $500 billion debt and a $250 billion “haircut” (loss)?  Why is this CDS payout issue even in the news?

“ European leaders said in today’s agreement they ‘invite Greece, private investors and all parties concerned to develop a voluntary bond exchange’ into new debt.  The Institute of International Finance, which represents lenders, also helped progress toward an accord that the EU could portray as non-mandatory.”

Voluntary, voluntary, voluntary.  Nobody’s being forced, only “invited”.  The creditors are “voluntarily” agreeing to swap the old Greek bonds worth $500 billion (which will never be paid) for new Greek bonds worth $250 billion (which might be paid).  In doing so, Greece’s creditors are “voluntarily” accepting a $250 billion loss which the EU can “portray” as “non-mandatory”.

It doesn’t require a genius IQ to understand that nobody takes a $250 billion loss “voluntarily”.  What we’re seeing in the EU is political and economic theater whereby it’s possible to falsely “portray” the $250 billion loss as “voluntary”.

“David Geen, ISDA’s general counsel in London, confirmed that the agreement probably won’t trigger the Credit Default Swaps because it’s voluntary, even if there may have been some ‘coercion . . .  from our point of view it is voluntary . . . [but] There’s been a lot of arm twisting.”

In truth, the creditors must’ve had their arms twisted out of their sockets before they agreed to take a $250 billion loss.  The creditors probably “voluntarily” agreed to take that “haircut” in the same sense that some businessmen “voluntarily” entered into agreements with Don Corleone after he “made ‘em an offer they couldn’t refuse”.

There’s no doubt that accepting the $250 billion loss was compulsory.   Nevertheless, for some obscure reason, it was still deemed critical that the entire process appear to be “voluntary”.

More–unless the real magnitude of the Credit Default Swaps is enormously greater than the $3.7 billion being admitted–the fuss about paying or not paying $3.7 billion in Credit Default Swaps to the creditors is good evidence that money is not the primary issue.  It’s not about $3.7 billion.  It’s not about a $250 billion “haircut”.  The current EU agreement is primarily and critically about establishing that the debt restructuring process is “voluntary”.


•  I suspect that the answer may lie in the fact that if the 50% losses are accepted “voluntarily,” then “technically,” Greece has not defaulted on its debts.

The illusion of voluntariness is a crock.  Greece has already defaulted.  Greece is defaulting.  Greece will continue to default on into the future.  But the “appearance” that Greece’s creditors had “voluntarily” accepted a 50% loss supports the illusion that Greece has not actually defaulted.

The need to deny a Greek default may also explain why the EU has tried to prevent the Credit Default Swaps payouts.  The CDSs only pay out the $3.7 billion if the creditor’s losses are “forced” rather than “voluntary”.  If the 50% losses on Greek bonds are “forced,” the CDS would have to pay out $3.7 billion.  But such payout would be absolute evidence that the government of Greece had, in fact, defaulted on its debts.  In order to maintain the illusion that Greece has not defaulted, they can be no CDS payout.

Thus, Greece’s creditor have not only generously “volunteered” to take a $250 billion loss on their original investments, they’re also generously “volunteered” take another $3.7 billion loss from the CDSs—all to maintain the illusion that the government of Greece has not actually defaulted on its debts.

•  Why is it so critical to maintain the lie that the government of Greece has not defaulted on its debts?

There may be a number of technical reasons, but in general, I can imagine only two:  1) “The horror!  The horror!”;  and 2) “It ain’t no thing.”

1.   By “The horror!  The horror!,” I mean that if it’s publicly admitted that a “sovereign” like the Greek government has, in fact, defaulted—that public admission would trigger a domino-like chain of consequences that would collapse the European and global economies.

I.e., if a “sovereign” government defaulted, the sky would truly fall.  We’d experience 40 days and nights of rain and a thousand years of darkness.  Those who survived would be driven back into the stone age.

OK, OK—maybe the consequences of a Greek default wouldn’t be quite that grim.  Nevertheless, the consequences of a Greek default could be dire.  According to German Chancellor Angela Merkel:

“Nobody should take for granted another 50 years of peace and prosperity in Europe. If the euro fails, Europe fails.  We have a historical obligation: To protect by all means Europe’s unification process begun by our forefathers after centuries of hatred and blood spill. None of us can foresee what the consequences would be if we were to fail.”

Thus, Ms Merkel implicitly warned that if Greece’s creditors didn’t “voluntarily” accept the $250 billion “haircut,” it could cause the failure of the euro, which would destroy the EU, which might precipitate World War III.

If she’s right, only a madman would risk the horrific consequences of a Greek/sovereign government’s default.  Thus, borrowers and creditors must voluntarily “play nice” to avoid “The horror!  The horror!”

2.  On the other hand, there’s a second mindset that might result from a Greek default—the recognition that “It Ain’t no thing.”  In other words, the Greek government might default and the sky might not collapse; the rain might not fall for 40 days; and humanity might not be pushed back into the stone age.

If it were admitted that the Greek government had actually defaulted, the adverse consequences for people of Greece might be soon shown to be no more significant than the adverse consequence that impacted Iceland after its people refused to pay their government’s debts.  After an initially difficult period, Iceland’s economy revived, and their world did not come to an end.  Some would say that defaulting actually served Iceland very well.

Of course, Iceland is a tiny little place with a population of only 320,000.  Its economic eccentricities (the people’s refusal to pay their government’s debts) are insufficient to set much of an example for the rest of the world.

But.  What if the people of a larger nation like Greece (pop. 11 million) not only defaulted, but said “To hell with it—we’re not paying off on any of our government’s bonds to the banksters”?

And what if the people of Greece not only refused to pay their government’s debt, but—after a difficult year or two—found themselves stronger, debt-free, and even free from a national debt-bondage to the world’s big banks?

If the people of both Iceland and Greece could repudiate their government’s national debts and live happily ever after, how many other nations might be tempted to follow their examples?

If sovereign debt default were no longer equated to Armageddon, the whole world might repudiate their government’s debt, reorganize—and thereby wipe out the big banks and the foundation for the New World Order.

Thus, if Greece was publicly admitted to have defaulted, lost it credit rating, and still survived, the great powers of the central banks and New World Order might be badly compromised.  The world might rediscover that it can get along just fine (as it did for almost all of history) without credit.

•  In the end, it’s the threat of losing our credit rating that makes a debt default so scary.  But this loss is only frightening because, over the past 50 years, we’ve been slowly conditioned to believe that we can’t live without credit to pay our debts.  We take it for granted that civilization will end without credit and high credit ratings.

Insofar as we’ve become credit junkies, we’ve become absolutely dependent on the banks/pushers that “give us each day our daily fix” of credit.

But, if Greece defaulted, lost its credit rating, and still survived, it might prove to the rest of us credit junkies that we could also quit the credit drug.   Once we stopped depending on credit, we’d lose our dependence of our banks/pushers.  Those banks/pushers would no longer be “too big to fail”.  If a bank failed it might elicit no more remorse than the death of any other drug pusher.  In essence, if Greece defaulted and life went on, people might begin to view the banking system as a convenience rather than a secular god.

•  If debt default (and loss of credit rating) were shown to be survivable, big governments might also be disabled.

In the case of Greece we’re talking about a sovereign debt default—a public default on the debts owed by a government—but not necessarily owed by private people or private industry.  In essence, a sovereign debt default is evidence that the purported “sovereign” (the Greek government) is unable to persuade or compel the Greek people to pay its debts.  A sovereign debt default indicates that a government has lost control over its people.

The government of Greece, like all governments, is a parasite.  It produces nothing and consumes much.  We tolerate our big governments because we’re convinced that we can’t survive without them.  Why?  Because big governments have big credit ratings that allow them to seemingly provide an endless supply of “free lunches” in the form of welfare and subsidies.

But if the people no longer voluntarily agree to pay all of their government’s debts, the government must default.  If it defaults, its credit rating will decline and it’ll have less access to credit.  Less credit means less “free lunches” (which actually aren’t “free” at all, but are charged to future generations).  If government can’t provide free lunches (welfare and subsidies), the people will become increasingly unwilling to be taxed into poverty to pay any of their government’s debts (in Greece, they call the high-tax phenomenon “austerity”).  Government power will decline; government size will diminish.

And strangely, Freedom might increase.

If Greece defaults and survives, the people of the world might not only realize they don’t need credit and don’t need banks, but they don’t need big government, either.   From the perspective of the bankers/pushers and big government advocates, that’s a realization that they can’t afford.

•  The great significance of the Greek government’s default may be less that Greece can’t pay than the people of Greece refuse to pay their government’s debts.  In the age of global “Occupy Wall Street” movements, if the people of Greece can get away with refusing to pay their government’s debts—and survive—their refusal to live their lives as debtors may inspire peoples around the world to also shrug off their national debts.

The ultimate reason why the Greek debt problem must appear to be resolved “voluntarily” may be that it’s not only the creditors are being compelled to “voluntarily” accept a $250 billion loss.  It’s also true that as part of this agreement, the Greek government and particularly the Greek people being compelled to “voluntarily” accept the obligation of repaying $250 billion in new Greek bonds.

Under the terms of the EU deal, the people of Greece are “voluntarily” accepting their role as debtors (credit addicts).  So long as that’s so, the banks retain their position as credit-pushers, the Greek government retains the illusion of control over the people, and freedom is “voluntarily” sacrificed to debt-bondage.

I suspect that the reason the EU agreement with Greece and its creditors must be “voluntary” may be to maintain the illusion of the Greek people are “voluntary” debtors in servitude to the bankers and big government.

If so, how long can this illusion be maintained?  Not much longer.

The Greek people have already rioted (refused to pay their government’s debt) over the mere terms of the expected austerity measures.  But while the terms of the austerity measures have been proposed, the majority of those terms have not yet been imposed.  We can reasonably assume that when the austerity measures are actually imposed, we’ll see more riots and more refusals to pay the Greek government’s debts.

Then, another crisis . . . another agreement wherein Greek creditors “voluntarily” accept $125 billion loss from the $250,000 now due . . . more riots, more refusals to pay . . . more haircuts . . . .

I’ll bet that before this is done, the Greeks don’t pay more than 10% of their government’s existing debt.

I can almost see Zorba dancing, breaking plates, grinning and shouting “Opa!


Posted by on November 1, 2011 in Banking, Debt, Economy, Money, What Can't be Paid


Tags: , , , , , ,

4 responses to ““Voluntary” Haircuts

  1. surabhi

    November 2, 2011 at 5:02 PM

    Beautiful article!! :)

    • David Hathaway

      November 25, 2011 at 3:56 PM

      If the heads of the banks declared that ” 2+2 no longer equals 4, NOW 2+2 equals 3″. Would 2+2 really equal 3? Of course not.

      In a similar way, if the head of the banks declares that taking 1/2 of what a bond holder is promised is voluntary, does that make it really voluntary? Of course not.

      The holders of Greek bonds are businessmen, and businessmen NEVER do anything voluntarily. They can’t because they are charged with managing other peoples money to the best of their ability. No one would voluntarily take 50 cents when they could take 100 cents. NO ONE.

      It is so ludicrous it is almost not arguable.

  2. Skekzyz

    November 3, 2011 at 9:20 PM

    They blow away your dreams
    With a single decimal point
    If you fight the powers that be
    You’ll wind up in the joint
    I just begin to see as the antichrist arrives
    Where we’re headed for
    As we charge away our lives

  3. Ray

    February 2, 2012 at 9:33 PM

    You’ve answered the question on top of my mind for awhile. I think answer #2 is the real answer. After all the Greek debt holders are mostly banks and insurance companies, which belong to the same group of people.


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