From the moment the IIF proposal first came out I have argued that it is a good deal for banks – no accounting loss – a highly rated zero coupon bond – and higher coupon payments – in exchange for extending maturity on debt that couldn’t be paid back. Banks were winners. The fiction of 21% haircut has been talked about by everyone with no real thought as to if there really was a haircut.
It was a good deal for the banks and not so good for either Greece or EFSF – whichever one was bearing the cost of the principal guarantee.
That the IMF believed banks would ever take a proper write down – reduce what they expect to be paid – is comical because the IIF proposal from the start was made to sound like a write-down even though it never was one.
So now, as a massive bailout is about to be announced and the fear of a Credit Event at the EU and IMF is at epic proportions, the banks expect they will get taken care of. Sadly it is probably good for bank share prices short term if they win but the regulatory animosity may grow and the occupy movement will get a more recent and specific event to focus on.
Since by now the EU should know where every single sovereign CDS trade is (because they must have asked the banks for that level of disclosure by now) they can go ahead and allow a good old fashioned default and kill some weak institutions and rebuild the system with healthier banks.
Or they will work with the IIF to create something they can spin as being a haircut for the banks that will in reality just be a convoluted way to get citizens to pay for it without even realizing it.
I like banks and it is their job to make money for their shareholders but it is sad the IMF and EU can’t see that and deal with it properly.