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Is the Greek Haircut Really a Default?

The market is apt to frame the same event differently.

Michael Zhuang, 10/27/2011

Thursday morning, I woke up to news that the Europeans, Germans mostly, have finally hammered out a deal with Greece, which now only needs to pay 50% of what it owes to private lenders (mostly German banks). German Chancellor Angela Merkel called this a 50% "haircut."

World markets cheered the news by rallying 2% to 6%. But wait a minute, how is it different from a Greek default? Is the market dumb or not?

There are lessons for investors in this:

Even for the same event, the market could frame it differently. The market could wear its dark glasses and call it a "default," "bailout," or "moral hazard," or it could wear its rosy glasses and call it a benign "haircut." How the market will frame an event is largely unpredictable.

What the market frets about often amounts to nothing. Remember this summer, the market tossed and turned, fretting about the impending Armageddon resulting from Greece being unable to pay its obligations. Now, the Greeks get a "haircut" and the market rallies.

Next time when the market is panicky, remember it could be about nothing more than a haircut.


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