The bondholders take (or are forced to take) a haircut. Similarly, make the owners of CDSes take a proportional haircut on their payout. This lowers the stress level enormously for the grantors of CDSes, who are mostly investment banks. Sure, many times the bondholders also own CDSes and so they will take a double hit...but that's life, that's the market.
And just who, in any case, asked the bondholders to buy any of these crappy bonds in the first place? It isn't as if Greece (and Italy, and...) were ever stellar credit risks in the past 60 years, now is it? The bondholders were chasing yield, and their chase came back to bite 'em in the arse.
The bondholders NEED to take a sizeable hit here, in the interest of restoring mkt discipline. And so do the CDS owners. The moral here is: when you make a bad investment decision, YOU MUST LOSE SOME CAPITAL, otherwise -- as we have seen for the past 4 years -- moral hazard runs rampant.
Of course, if you bought GM Bonds Obama would give you the ultimate haircut... a 100% loss on you bond investment so he could move the residual capital to the UAW pension fund... more like a decapitation than a haircut. Doesn't the constitution say something about the need for due process before you are deprived of property by the government... How's that working for you?
The really odd thing here is that the bondholders were pitched a deal a couple months ago to take a 21% haircut and be able to walk away. They refused and now they’re being told that a 50 to 60% cut is what is now under consideration.
These idiots in European banking must be really, really, really stupid, because I’m only slightly familiar with the numbers out of Greece and I would have been *all* over that 21% deal, saying “Where do I sign and in how many languages?” Because while I might not know the exact numbers, I can look at the recent trajectory of the Greek economy and see that they’re going to default on a lot more paper as their economy swirls down the drain and then pulls in the drain stopper after them. Their protests, strikes and work slowdowns are killing them, which leads to new rounds of austerity talks, which leads to more slowdowns and strikes... lather, rinse, repeat.
The problem could have been contained for awhile with a 21% haircut. It might have gained the Greeks a little breathing room to let the crowd fury die down because the Germans wouldn’t have had to make new demands every single week for more Greek budget cuts in order to get the bankers to agree to haircuts. But no, everyone decided to buy the jumbo cup of steamin’ stupidity, so here we are, talking of 50%+ haircuts and that will likely result in some Frog and Kraut banks tipping over.
Sigh. So much stupidity, So many people in dire need of a really good beating with a piece of pipe.
So little time in which to do it.