Friday, October 7, 2011
Reader "brodero" points to a website that generates this graph. I can't vouch for its accuracy or completeness, but it tells a pretty interesting—and very optimistic—story about how easy it should be to fix the Eurozone sovereign debt crisis.
The values I've selected above roughly reflect the current prices of PIIGS debt. For example, Greek debt is trading at about 60-65 cents on the dollar; assuming that is a "fair" price, then in a restructuring, debtors could expect to get a "haircut" on their Greek debt holdings of about 64%. The other haircuts I've selected are also in line with current market pricing of each countries' debt. For Ireland, however, I've selected a zero haircut, since I think Ireland is well on the way to emerging from this problem intact, via a very aggressive and successful austerity program. Bottom line, if all PIIGS' debt were restructured in line with current market pricing, then Eurozone banks would need a capital infusion of $135 billion or so in order to remain in compliance with a 7% Tier 1 capital ratio. If the required ratio is 8%, then the additional capital needed would rise to $225 billion. These are big numbers, but $225 billion is less than 2% of Eurozone GDP. That's a drop in the Eurozone GDP bucket, and it shouldn't be too hard to come up with that much money in order to resolve a debt crisis that otherwise threatens to bring down the entire global economy, should it?
If this calculator is accurate, then the only way of understanding why there is so much angst in the markets is to assume that markets are pricing in a cascading series of defaults that become far worse than current market pricing of PIIGS' debt assumes. That's not impossible, of course, but once again we see that the level of fear and pessimism that is impacting market psychology is extreme, to say the least.
Posted by Scott Grannis at 11:36 AM