How is that even after the proposed 50% haircut on Greek bonds, the Greek debt to GDP ratio is forecast to fall only to 120% by 2020? The answer is that the haircut only applies to privately held debts, not to official debt. Punish those nasty speculators, not government or agency creditors. There are a number of problems with not treating all debt as equal. Firstly, the required haircut for private holders must obviously be larger in order to give Greece the same level of debt relief. Which would make any smart private holder worry about lending to sovereigns in the future – hence rising interest rates for Italy and other debt laden European economies. A related problem is that in their desperation to have any scheme be “voluntary” so that CDS (insurance) payouts are not triggered, European authorities are likely to deter holders of insurance on European debt. Without access to insurance, the cost of debt will again rise. I wrote a piece a while ago about Ecuador’s default, and my puzzlement as to why the IMF insisted on being paid while at the same time not protecting private bondholders. I am still puzzled. Why does it make any sense to punish the private sector, and then expect fresh loans to “risk free sovereigns” to be forthcoming?