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European Debt Crisis

Greece closer to avoiding a messy default

Christopher Werth Jan 20, 2012

Adriene Hill: Negotiators in Greece are reportedly close to a deal that would cut the mountain of debt the country owes its lenders. The Greek government had been trying to convince banks to take a 50 percent loss on Greek bonds but the figure could be higher than that. The AP is reporting investors might lose as much as 70 percent on their loans to Athens.

Reporter Christopher Werth explains.

Christopher Werth: Greece needs to write down over $250 billion worth of Greek debt.

And to understand how that would work, I called Carsten Brzeski. He’s an economist at ING bank in Brussels. He says it all starts with the loss that banks would take on Greek bonds. a haircut. He told me that’s people mean when they say haircut.

Werth: And so, say I’m a bank, and I own a $100 worth of Greek bonds. What exactly is a haircut going to mean for me?

Carsten Brzeski: The Greek government owes you a $100. Then a haircut of 70 percent simply means you have to take an immediate loss of 70 percent in your books.

Werth: So my $100 turns into $30.

Brzeski: Exactly.

Problem is banks lent Greece much more than $100. But Brzeski says, the banks are willing to take the loss because a disorderly default in Greece could set off a panic in the global market. And that could cost the banks a lot more than a haircut.

In London, I’m Christopher Werth for Marketplace.

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