Government

When Default Inspires Relief

Greece bailout
Lefteris Pitarakis/AP

It's a sign of how grim things are in Europe that the first default in the history of the euro zone is being greeted with relief.

As part of bailout 2.0 for Greece, announced yesterday, most private investors who hold Greek bonds are expected to take a 21 percent loss on the net present value of their holdings. (The details are explained in this PDF.)

Bondholders have a few different options, which include trading in existing bonds for new ones that have a lower value but are backed, ultimately, by the EU. And the whole thing is voluntary (or, perhaps, "voluntary").

The plan will put Greece into what's called "selective default" or "restricted default" — a sort of default lite.

Just a few years ago, any sort of default by a euro-zone country would have been unimaginable. The treaty that created the euro didn't even mention default as an option. And since Greece's fiscal troubles began to spiral out of control more than a year ago, there has been widespread fear that a Greek default would lead to contagion.

What we're seeing now is just the opposite: A sort of anti-contagion, where bond yields for Portugal, Ireland, Spain and Italy are lower than they were just a few days ago.

This is partly due to the fact that the bailout package (PDF) announced yesterday includes a big new infusion of cash from the European Union, more EU guarantees, and lower interest rates on bailout loans for Ireland and Portugal as well as Greece.

But it's also the case that Greece was widely expected to default, despite assurances to the contrary from European leaders. Investors' response to the bailout looks like sign of relief that Europe has finally accepted reality.

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