The state of play in Athens
The state of play in Athens: more and more videos emerging of brutality in the events of last week. But in policy circles everybody's talking about "Brady Bonds" (the Financial Times editorial is advocating them).
Brady Bonds are being touted like the modern day panacea for financial crisis. So what follows is an explanation and a few caveats.
Fact: Greece has borrowed 340bn, half of it from its own banks and pension funds; another 25% (say) from the ECB, IMF and country governments, and 25% from banks, mainly in Europe.
So when, below, you read about the "Brady Bond" solution applying to the private sector, the first thing you have to ask is which part? Does it include the Greek private sector? If not, and I think it cannot, then the "Brady Bond" solution applies to just 25% of Greek debt.
Okay, so what is a Brady Bond?
In the late 1980s, after the IMF had scoured-out Latin America with poverty-inducing, "structural adjustment" plans, the problem arose that these countries could not pay their debts. Facing revolutionary struggles, the USA designed the following solution.
Mexico swaps its old, unpayable debts, for new debts with lower interest rates and smaller principal sums. Since this would have amounted to direct losses to the banks that lent the money, the difference was smoothed over by "securitizing" the new loans against US Treasury bonds, which carry a zero interest rate and are totally safe.
It's a bit like your parents guaranteeing your mortgage. You, the feckless youth sleeping until 12 noon, are a massive credit risk but your parents will theoretically lose their home if you don't make the payments, so the risks are minimal.
Now the same is being advocated for the Eurozone, but there are problems, and I will list them.
First, in the Brady Bond initiative, lenders to LatAm clearly lost money. This was only not recognised as a default because of massive political pressure of the kind that US presidents could at that time exert onto global markets.
They were specifically designed to "take bad debt off balance sheet". But now, three years on from Lehman and ten years almost to the day with Enron, we are not supposed to take bad debts off balance sheets. And we have ratings agencies that are duty bound to value such debts on a transparent global benchmark.
Second, 1989 was a good year to begin hiding bad debts. Soon the world would come good. Even the busted financial systems of Scandinavia revived within three years. The 1990s saw the benign onset of globalisation for many emerging market countries - including nearly all those who took advantage of the Brady scheme.
Third, the US Treasury is a sovereign issuer of currency and debt, and can raise taxes. The ECB issues currency; issues liquidity rather than debt, and cannot raise taxes.
Anybody in a ratings agency who equates a 1989-style Brady Bond with what is being proposed now might stand guilty of that old "structured by cows" problem.
The moment the ECB can truly perform the conjuring trick of a Brady solution in Europe is the moment it starts to raise taxes and issue transnational bonds against the tax revenue of the entire zone. Which is not soon.
Some commentators have proposed that it is simply Germany that issues the new debt. Taking Greek junk bonds in return for risk-free Bundesbank ones.
Yeah, right, as an election looms I can see that playing well.
In the end, Brady was an accounting trick that gave breathing space and it was possible because of the political and economic strength of the USA in the economy of 1989 (and the non-controversiality of accounting tricks in that just-born global finance system).
Maybe it is me being thick, but given all this, why are Brady Bonds being touted seriously as the solution to it all? Feel free to enlighten me.