Joseph Stiglitz over at The Guardian writes three possible explanations for why the European Central Bank is pushing for a 50% voluntary cut, that will not be considered a “Credit Event” so no insurance will be paid out.
1. ECB knows/suspects that the affected banks have not bought insurance.
2. ECB fears that the lack of transparency could make an involuntary default lead to a credit market freeze (think Lehman in 2008).
3. ECB is trying to protect the insurers.
He argues that number three is the only one that puts forth the interests of the public first, as the other two if true have very clear beneficiaries. If banks were not insured against a Greek default a voluntary haircut with a guaranteed restructuring would be a good outcome. Likewise if the a vast majority of the banks are insured. The banks who issued the insurance might benefit from the restructuring being a non credit-event. Of course not all three alternatives have to be mutually exclusive and that is the root of the ECB’s current dilemma.
The ECB wants to avoid contagion. With Portugal, Spain and Italy the countries whose debt will be harder hit if Greece does not reach an agreement the incentive for the ECB to avoid a credit default is paramount as both the bond holders and the insurers are all in this mess together.