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Haircut Contagion Watch: Dallara's Comments

Friday, 9 Mar 2012 | 5:43 PM ET
European Bank Note
Sabine Scheckel | Image Bank | Getty Images
European Bank Note

Earlier today (Friday), my colleague Michelle Caruso-Cabrera asked Charles Dallara, the managing director of the Institute of International Finance, whether the success of Greece’s debt restructuring would prompt other countries to demand similar reductions in their debt load.

Dallara took a strong position against further restructurings, arguing that the Greek situation was unique. No other European economies are as deeply distorted by their debt load as the Greek economy is, he said.

“I would strongly discourage other countries from going this route,” he said.

Well, yes. Dallara represents bondholders, so of course he doesn’t want other countries to demand haircuts. That’s hardly a surprise.

What Michelle asked him, however, was something different: will other countries look to Greece’s restructuring and seek out their own?

Dallara offered two substantive points.

First, he argued that the restructuring has been "extremely painful for the citizens of Greece."

Next, he said that further restructurings would damage Europe.

“It has cast a cloud over the euro zone that has hung there for months and months. And prevented the building of confidence,” he said.

Neither point is very persuasive. It hasn’t been the debt restructuring that inflicted pain on Greece. It has been the austerity measures demanded by public and private creditors. The debt restructuring actually provides some relief to Greece. Its government can spend more than it would be able to without the restructuring.

Spain, Italy, Portugal and Ireland all have their own versions of austerity budgets. It’s not too much of a stretch to argue that they are getting a far worse deal than Greece—austerity without debt relief.

Dallara’s second point—that more restructurings would be bad for European economic confidence—is even weaker. Do you really expect, say, the people of Spain to avoid demanding a restructuring because making those demands might damage the economies of other European nations? Do you think that a “let’s do what’s right for Europe” platform would defeat a “put Spain first” campaign? Me neither.

Warren Mosler, who has been sounding the alarm bell about the possibility of Haircut Contagion for months, wasn’t impressed by Dallara’s arguments either.

“Mr. Dallara and the rest of the euro mob have as yet not come up with any reason any one nation wouldn’t be better off, as evidenced by Greece, with a whopping big tax on bond holders vs the usual tax hikes and spending cuts otherwise demanded,” Mosler writes at MoslerEconomics.

I’m not convinced Haircut Contagion will definitely happen. I’m not even sure it’s the most likely outcome. But there’s at least a good chance that we end up with serial restructuring.

And no one really seems prepared for that at this point.

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