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
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.


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