Temporary Default Included in "Marshall Plan"; Role of EFSF to Dramatically Increase

It appears Jean-Claude Trichet is about to have the word "default" stuffed down his throat. YahooFinance reports Eurozone set for Greek deal, temporary default

European leaders were poised to sign off on a second bailout for Greece on Thursday, even at the cost of making the country the first euro state to partially default on its debt.

With the new rescue program, leaders want to "address the problems really at the root," by lightening the country's debt burden and restoring its economic competitiveness, German Chancellor Angela Merkel said as she arrived at an emergency summit in Brussels.

That will include getting private creditors to contribute to new aid, a move that would put Greece in so-called "selective default," a partial renege on its debt deals.

Dutch finance minister Jan Kees de Jager said objections "to avoid a selective default ... have been swept from the table." Speaking to lawmakers in The Hague, de Jager said the plan for Greece would "do something for the debt duration and also lower the debt burden."

Few economists believe that even with more support, Greece will be able to repay its debt -- some euro340 billion ($483 billion) -- without some kind of cut to the overall value.

However, so far the eurozone has ruled out forced haircuts on Greece's debt, fearing that it would heighten panic on financial markets and destabilize larger economies like Italy or Spain.

Instead, the 17-country currency union has been working on an alternative support plan that will see banks and other private investors give Greece more time to repay its bonds, while the eurozone and the IMF will continue to prop up the country with rescue loans.

For a few days this week, the eurozone had hoped that it could stay clear of a selective default rating by instead recouping some of the money they spend on new loans for Greece through a tax on financial institutions. Yet that plan, strongly opposed by banks that don't hold Greek bonds, did not survive last-ditch talks between Merkel and French President Nicolas Sarkozy Wednesday night.

Look for Trichet to come up with some lame reason why the ECB will be able to temporarily hold defaulted bonds. Alternatively the ECB will be bailed out by selling them to the EU's EFSF, the European Financial Stability Facility whose role is about to get much bigger.

I must caution there are still no firm details, likely on purpose.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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