Greek Default the Biggest in History? No Problem, Says Bernanke!

On Friday, Greece reached a deal to "restructure" its national debt. As part of the deal, creditors to the nation will see the face value of their debt cut from about $266 billion to $133 billion.

Dollar for dollar, pound for pound, and euro for euro, Friday's deal ranks as the biggest sovereign restructuring in world history. But don't worry. According to Federal Reserve Chairman Ben Bernanke, it's no big deal for the U.S. The man who famously assured us in 2007 that the subprime lending crisis was "likely to be contained," now vows that he'll protect the "U.S. financial system and the economy" from Europe's mess.

Don't believe it.

A real problem - Europe's debt

It's a Really Big Deal

Supporters of the Greek restructuring are hailing it as a breakthrough, paving the way for Europe's central bank to loan Greece $47 billion to help cover the budget deficit, and help bring Greece's spending in line with its revenues. Through the use of certain "legal tools," Greece can extend the terms agreed to by a majority of its creditors to nearly 96% of all creditors, writing down bonds left and right until, at the end of the day, Greece has cut its debt by half.

That sounds like good news. And yet, skeptics point out that even after the writedowns, total debt will still stand at 120% of Greece's GDP. Unemployment in the country remains at 21% (and you thought we had problems).

It gets worse. Getting back to a balanced budget will require Greece to lay off some 15,000 public workers and cut minimum wages by 22%, both of which will hurt economic growth. Economists estimate Greece will still be in recession five years from now -- and that's the good news.

The bad news is that Greek voters are rioting over the planned austerity measures. If the public scuttles the reforms, Greece's bailout could still fail.

Bankruptcy By Any Other Name

Adding insult to injury, ratings agencies Fitch and Moody's both declared the Greek restructuring a "default" Friday, while the International Swaps and Derivatives Association confirmed that the deal was a legally defined "credit event." This means that banks that sold credit default swaps (insurance against a Greek default) must pay out $3.2 billion to the companies that bought such insurance policies.

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Despite all this, Chairman Ben assures us that the U.S. is safe. None of this will affect us a whit. Does that sound likely to you?

Consider that $133 billion worth of Greek bonds essentially just went "poof." Great news for Greece, but what about the folks who were owed that debt? Even after you subtract the effect of the default swaps, Greece's creditors just saw $130 billion disappear into thin air.

What Does This Mean to You?

According to public information, about 30% of Greece's debt was owed to the European Central Bank and various state creditors. A further 29%, to Greek and Cypriot banks, pension funds, and other financial institutions. But those weren't the only lenders.
  • The IMF (in which the U.S. government owns a stake) holds 5% of Greek debt. Greece's default just blew a $6 billion hole in its balance sheet -- a hole that U.S. taxpayers will have to help fill.
  • Meanwhile, $6 billion in funds that could have gone to improve the economies of developing countries, and boost demand for U.S. exports, is gone.
  • Closer to home, more than a third of Greece's debt resides in the hands of various "non-Greek private investors." That means individual investors, and the banks, pension funds, and hedge funds we invest in.
Some of these folks we know -- for example, financial heavyweights Och-Ziff Capital and Credit Suisse have both publicly acknowledged investing in Greek debt. Others we don't know. Experts say that perhaps 25% of Greece's private creditors cannot be identified from publicly available information.

One thing's certain: When Greece defaulted Friday, we all collectively lost some $48 billion in net worth. That number's bigger than the market cap of all but a half-dozen of America's biggest banks.

Widespread Debt: This Is Only The Beginning.
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Greek Default the Biggest in History? No Problem, Says Bernanke!

With a national debt still hovering around 120% of its GDP, Greece is still far from being out of the fiscal woods. As austerity measures bite, Greece's GDP will shrink further and its debt-to-GDP ratio will rise, putting it on course for further defaults -- er, "restructurings." Nor is Greece alone. According to official figures, debt-to-GDP ratios elsewhere are similarly high.

Photo: Gerasimos, an 83-year-old Greek man, picks through a heap of rubbish to salvage useful items as the marble gate of the Roman Agora is reflected in a mirror, in the Plaka district of Athens on Monday, March 12, 2012. Greece implemented the biggest debt writedown in history on Monday, swapping the bulk of its privately-held bonds with new ones worth less than half their original value. (AP Photo/Petros Giannakouris)

Debt-to-GDP ratio: 130%

Photo: President of Iceland Ólafur Ragnar Grímsson prior to voting in a referendum in Reykjavik, Iceland, Saturday, March 6, 2010.   Icelanders voted "no" in a nationwide referendum on approving the use of $5.3 billion of taxpayers' money to repay international debts.  The "no" vote may complicate Iceland's effort to recover from a deep recession and a banking collapse. (AP Photo/Brynjar Gauti)

Debt-to-GDP ratio: 120%

Photo: A man reads a newspaper in Milan, Italy, Monday, Jan. 30, 2012. European leaders are trying to come up with ways to boost economic growth and jobs, which are being squeezed by their own governments' steep budget cuts across the continent. The 27 EU leaders meeting in Brussels are also looking for common ground on a new treaty to toughen spending rules to dig the continent out of a crippling debt crisis. (AP Photo/Luca Bruno)

Debt-to-GDP ratio: 110%

Photo: Workers seen at the Luis Onofreâ luxury shoe factory in Oliveira de Azemeis, Portugal, Friday, Feb. 24, 2012. Debt burdens are rising fastest in European countries that have enacted the most draconian austerity programs. Portugal's unemployment rate hit a record 14 percent at the end of last year and the government imposed austerity measures to slash costs: Portugal cut pensions, reduced public servants' wages and raised taxes starting in 2010. (AP Photo/Paulo Duarte)

Debt-to-GDP ratio: 105%

Photo: People walk past a beggar on a bridge in Dublin Monday Feb. 20, 2012. Bank of Ireland, the only one of Ireland's six banks to avoid nationalization, reported it returned to net profit in 2011 thanks to heavy debt restructuring in the face of continued losses from dud loans. (AP Photo/Shawn Pogatchnik)

Debt-to-GDP ratio: 102%

Photo: The shadow of Republican presidential candidate, former Massachusetts Gov. Mitt Romney, is seen on a representation of the National Debt Clock as he spoke at a town hall meeting in Kalamazoo, Mich., Friday, Feb. 24, 2012. (AP Photo/Gerald Herbert)

Debt-to-GDP ratio: 85% each

Photo: Reflected in a window, people walk in London's City financial district, Tuesday, Feb. 14, 2012. Britain's AAA credit rating was put on a "negative outlook" by ratings agency Moody's, amid fears over weaker growth prospects and potential shocks from the eurozone crisis. Britain's Chancellor George Osborne said the assessment was a vindication of the Government's tough austerity measures and "a reality check for anyone who thinks Britain can duck confronting its debts". Moody's downgraded the ratings of six countries and also put France and Austria on the same caution as the UK amid violent protests in Greece. (AP Photo/Lefteris Pitarakis)

Debt-to-GDP ratio: 82%

It makes you wonder: Who will be next in line to default? And when they do, will we call that "good news," too?

Photo: A pedestrian looks at a sign in a shop reading: ''One euro, price haircut'' in Athens on Thursday, March 8, 2012. (AP Photo/Thanassis Stavrakis)


Motley Fool contributor Rich Smith does not own shares of any companies named above.
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