Why Greek lenders don’t like the idea of a haircut

Marketplace Staff Nov 10, 2011

Why Greek lenders don’t like the idea of a haircut

Marketplace Staff Nov 10, 2011

Steve Chiotakis: The central part of the European Union’s deal to solve the debt crisis is a so-called
‘haircut’ on Greek debt.

That word haircut had me scratching my own head all week — so I asked Marketplace Senior Editor
and Whiteboard guru Paddy Hirsch to enlighten me.

So he dragged me on a field trip to better explain how a haircut really works. And guess where we wound up?

Mohawk Matt: Welcome to Bolt Barbers, gentlemen. My name is Mohawk Matt, and I’ll be your tonsorial specialist today.

Chiotakis: Tonsorial? Nice to meet you, Matt. Hey, this is a comfy chair!

Paddy Hirsch: Hey Steve, I know we’re talking about bonds, but try to stay focused here.

Chiotakis: All right, sorry.

Hirsch: So a haircut. That sounds pretty painless, right?

Chiotakis: Sure, I need one myself, actually, Paddy. I’m glad you sent us here.

Hirsch: All right, Matt, if I asked you to give Steve a 50 percent haircut, what would you take that to mean?

Mohawk Matt: I’d say you wanted me to cut off half his hair.

Chiotakis: Whoa, that’s OK, I guess — uh, it’ll grow back.

Hirsch: Yeah, your hair may grow back, but if you’re a German bank getting a haircut on Greek debt, there’s no growing back — that hair is gone.

Steve’s 50% haircut from Marketplace on Vimeo.

Chiotakis: That hair’s gone for good?

Hirsch: For good. Let me illustrate — give me $100.

Chiotakis: Right now, here?

Hirsch: Come on, you know, lend it to me. You know I’m good for it.

Chiotakis: Uh, OK, here you go.

Hirsch: Uh oh.

Chiotakis: Uh oh what? Uh oh?

Hirsch: Mate, I’ve run out of cash. I can only pay you $50 back.

Chiotakis: What do you mean — you owe me $100!

Hirsch: Yeah, but I can only pay you $50 back.

Chiotakis: What about next week?

Hirsch: No. Never. You just took a 50 percent haircut, my friend.

Chiotakis: Ouch! That’s a 50 percent haircut?

Hirsch: Yes. So imagine how all the banks that lend Greece about $280 billion are feeling right now.

Chiotakis: I would say $140 billion short, I guess.

Hirsch: Yeah, and remember, they’re banks who borrow at one rate and then lend at another. So that’s $140 billion they owe to other people. So Greece may end up wiping that debt off its books, but that debt still exists. And now their banks have to find a way to pay that money back to their depositors.

Chiotakis: And they don’t have that money, I’m sure, lying around.

Hirsch: Well we’re not sure. Some may, some may not. We’re going to have to see how much money those banks have on reserve, and if they don’t have enough, then there’s a real danger they could start failing. You know, runs on banks, that kind of stuff. And then it could be Lehman Brothers all over again.

Chiotakis: That’s pretty depressing, Paddy.

Hirsch: I’m sorry, mate.

Chiotakis: Haven’t stopped me, though, from wanting to get my own hair cut. Hey Matt, just 10 percent off the top?

Mohawk Matt: Why don’t we take a little bit off the sides as well?

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