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Greek debt deal will have others demanding the same

If I were in Dublin or Lisbon or Madrid, I would be thinking: You lucky, undeserving bastards.

The bastards are, of course, the Greek Treasury and Finance thugs – led by that bulldozer of a Finance Minister, Evangelos Venizelos – who shook down private holders of Greek sovereign debt for more than €100-billion ($130-billion). The investors really had no choice in the deal. Athens presented them with an all-or-nothing option, to the point that the coalition of the unwilling was squeezed out through retroactive collective action clauses.

As a result, their bonds will lose more than 70 per cent of their net present value and Greece's crushing national debt of €350-billion will be reduced by a bit more than €100-billion.

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The debt-crunch effort, which is bound to be legally challenged by the investors who hold the small proportion of the debt governed by international law, was essentially ordered at gunpoint by Athens, the European Union, the International Monetary Fund and the European Central Bank (the latter three are known as the troika). Without it, the EU and the IMF would have withheld Greece's second bailout, worth €130-billion, and the country would have imploded like Lehman Bros.

Now, pretend you are the finance ministers of Portugal, Ireland and Spain, the three most economically and financially stressed countries in the euro zone, after Greece. Me too, you would say; you would also want special treatment to lighten your debt financing burden.

You could ask, but you would get this answer from the troika: Dream on, debt pigs.

The troika has made it abundantly clear that Greece is a special case, a never-to-be repeated exercise in sovereign debt elimination. Indeed, last summer, the EU leaders said that Greece's debt "haircut," to use the argot of the bond traders, "would not be replicated in Portugal."

This must have made the gums of the Portuguese and Irish finance ministers bleed with rage. Corrupt, feckless Greece had lied for years about the size of its budget deficit and debt. It had allowed tax evasion to become a national sport. It had failed to meet most of the conditions of its first austerity package. That was the one it had agreed to put into place in 2010 in exchange for its maiden bailout, worth €110-billion.

And yet Greece was rewarded for endless bad behaviour. It nailed lower interest charges on its bailout loans (saving an estimated €1.4-billion over five years) plus the right to frog-march private bond investors into the barbershop for a buzz cut and secure a second bailout.

Portugal and Ireland got no goodies, even though they collected taxes, implemented their agreed austerity programs and generally obeyed the troika's every command.

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Of course the troika's big fat "No" to special treatment for other ailing countries can't stop the ailing from asking. Why wouldn't they? Their governments have fiduciary duties to get the best value for their taxpayers.

Ireland had started its lobbying effort for bailout concessions well before Greece knew its debt haircut would succeed. It wants the ECB to cut the cost to the government of bailing out its banks, whose collapse triggered the Irish rescue. "If the ECB are prepared to make this kind of concession to Greece, it would encourage me to think that they might be ready to make concessions on the promissory note to Ireland," Irish Finance Minister Michael Noon told state broadcaster RTE earlier this year.

With Greece (at least temporarily) fixed, you can bet Ireland, Portugal and perhaps Spain will ramp up their lobbying effort for favours. Spain is already jockeying for position, it appears. Last week, the country's new centre-right Prime Minister, Mariano Rajoy, surprised EU officials with the news that Spain had no intention of meeting its 2012 target deficit of 4.4 per cent of gross domestic product; the new target is 5.8 per cent. Might he blow another target unless he gets some concessions on the EU's new fiscal-discipline treaty?

The problem for the troika is that delivering special treatment to one country – Greece – virtually guarantees that it will have to do the same to anyone else who comes cap in hand. That's not just because it has set a precedent with Greece; it's also because the Greek haircut has the potential to make the economic and financial situations worse in the clapped-out countries, Italy included.

How? For the simple reason that the Greek debt haircut turned private bond holders into second-class citizens. The Greek bonds held by the ECB were exempt from the haircut, which only pushed more losses onto the private bond holders. The collective action clauses were inserted retroactively. No investor would have bought the bonds if the CACs had existed at the time of purchase.

The result is wholly predictable. The Greek haircut will rattle the debt market in the weak countries once the soothing effects of the ECB's €1-trillion gusher of cheap loans to the European banks wears off. Note that Portuguese bond yields are already pushing back up to 14 per cent, a near doubling in one year. That's a crisis level.

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It looks as if Portugal, like Greece, will need a second bailout. It also looks like Portugal will demand a Greek-style haircut on its privately held bonds. The rising Portuguese bond yields suggest investors know their investments could get clobbered. The troika may have contained the Greek crisis, for a while. But it has set the stage for the opposite elsewhere in the euro zone.

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