The news out of Europe continues to create volatility as EUROCRATS vacillate between defaults and bailouts. It seems that the Greeks will vote on a “new and improved” austerity package that, if accepted, will allow the EMU,IMF and ECB to provide the needed funds to get Greece through the immediate crisis.
Lies compounded by lies has made the situation much more difficult to comprehend. The problem is one of insolvency but because of the opaqueness of the entire EU, it is very difficult to ascertain who is in fact insolvent. Even though the European Union ran bank stress tests, very little is known about which banks will be insolvent in the event of a sovereign default. The biggest fear is that a Greek default will become contagious to the other peripheries and several of the large banks in France and Germany.
Another lie is that the EUROCRATS do not want the “EMPTY CREDITORS” [read speculators] to be paid out on a default so the Orwellian nature of Brussels is trying to manufacture a default by any other name. Today, the French government persuaded the large French banks to accept a type of BRADY BOND solution, which would extend the maturities of Greek debt in order to buy time for the credit hit to be spread out over time–deemed by the politicians to be a non-default. However, the ratings agencies have opined that any extension of duration would result in a DEFAULT.
The battle lines are being drawn between the nation-states and rating agencies. Interestingly, Frankfurt was looking into certifying a new European ratings group so the pressure will continue to build against S&P, Fitch and Moody’s. All the talk out of Brussels is totally devoid of the impact of domestic politics. It is the Greek Parliament who now holds Europe’s immediate financial fate in the raised hands of 151 Greek members of Parliament.
Democracy is still the prevailing means of political decision making and if the Greek politicos listen to the voices of dissent in Greece, the Parliament may well vote NO just to get Europe to raise the ante–sounds similar to the rejection of the first TARP vote in the U.S. HOUSE. The Greek nation has more to gain by pushing the DEFAULT game a bit further to maybe get some modicum of relief from the coming ravages of austerity.
The NEGATIVE FEDBACK LOOP that is perpetuated by an austere budget in a declining economy with no ability to devalue its currency may be too sadistic for a Greek populace staring into the abyss of financial contagion. Sadists of economic rectitude and the lies they promote have placed an already fragile global financial system into a very precarious predicament. Oh well, WEN will we have some certainty?!?!
For a quick update on the impact of austerity budgets:
Portugal 2/10: -260 basis points
Ireland 2/10: -135 basis points
Greece 2/10: -1114 basis points
These are the inverted curves of economies attempting to ring out the excesses of inflation. Unfortunately, economies in question do not have the problem of excess inflation but rather excess debt, which would normally call for negative real rates of return an steep curves.
As Brussels has dithered and deceived, the markets have exacted a price,a very high price. Where it all ends it is impossible to know but Athens will be the first test of the people versus the political elite of Brussels. Will Sisyphus roll the rock further or will the Greeks call the existential question for the EU???
Tags: Brady Bond, default, ECB, EMU, Eurocrats, France, Germany, Greece, IMF, negative feedback loop
June 27, 2011 at 8:34 pm |
Yra,
nice blog. I came via JS.
For me, queries, as to Euroland, are misdirected. We have too many problems here in the USA.
BB will print and ship to Europe. The Chinese are talking about supporting Euroland. Everyone is afraid that one or more counterparties to the some $600 Trillion in notional value of derivatives may fail.
This is like the Cold War with all missile silos in the USA and the USSR open with weapons armed and ready to launch. Bombers approaching fail-safe. Back then, the antagonists could go off of red alert and stand their weapons down.
Today, all financial weapons have been launched. A party has bought a guaranty, manufactured by a counterparty. The manufacturing process escalates without restraint. Back in 2008, derivatives totaled some $500 trillion.
Someone might have an answer, as to how the manufacture of derivatives can be:
1) restrained;
2) bonded with good faith money like options;
3) decoupled from the banking system;
4) other.
If the process is not halted/restrained, something unfixable will break.
peter
June 28, 2011 at 5:42 am |
Peter–welcome aboard and all constructive comments leading to dialogue and hopefully quality trades or preservation of capiaital is what this blog tries to promote.Hopefully others will chime in and answer.Hopefully the community will grow as good analysis should do the inverse of Gresham’s law–let good analysis drive out the crap that fills the air
June 28, 2011 at 9:54 am |
Peter,
I agree with you that the whole thing has turned into a mexican standoff. Unfortunately, the only solution I see is to let those who so grossly misspriced risk bear the consequences of their actions.
Yra,
With respect to greece, what do you think a declaration of default by the ratings agencies will actually entail? Theoretically it would mean the ECB would no longer accept greek bonds as collateral, but since you pointed out how much exposure the bank currently has I am assuming they will eat their words. I’ve also read that CDS defaults are determined by a separate entity (the ISDA). I’m guessing that banks will no longer be able to consider greek debt as teir one capital, but I was hoping you could shed some light on the subject.
Thanks,
-Greg
June 28, 2011 at 10:11 am |
Greg–right you are in all points here.The ECB is on the hook for far more capital then they have and yes they will threaten to accept Greek sovereigns for collateral causing a banking crisis throughout Europe ,think Lehman,which is what everbody is trying to avoid and why they need to keep buying time until at least 2013 when the ESM takeover.The ECB is into up to their eyeballs which is why Axel Weber probably saw nothing to be gained in attining the ECB Presidency.Time is what everybody is playing for –remember trichet retires in November and as in the Latin American debt debacle of the 80’s the effort is to just keep the interest payments comingso as not to declare the debt non-performing .The ISDA issue is going to be a problem for that is where the concept of EU law may be called to question—What exactly is a default and if ISDA contracts are not honored because of Euro efforts to curtail the effects of contractural obligations then financial markets are going to be roiled and the OTC credit markets are going to be dealt a severe blow—Is Europe an entity that abides by the rule of Law,Defenders of the EU will bend the definitions in all types of ways to support the decisions to punish the “empty creditors” who own CDS’s
June 28, 2011 at 11:44 am |
Yra,
Brussel’s EU straitjacket is the ultimate ‘too big to fail’ project. The writing was on the wall way back in 1992 when Denmark voted NO to the Maastricht treaty and was told to vote again. From then on it was clear that democracy would play no further role. I laugh when we are told the German people won’t continue to accept bailing out the PI(I)GS. Through what democratic channel can they oppose it. The Center Left party in Germany will not do anything different to Merkel’s . Through all means, fair and foul , Greece will kept in this pie in the sky project. Because that is the way the faceless men in Brussels have always operated, democracy, rational thinking and free markets have never played a role in the decision making process.
Great blog, one of the few I read religiously. Have been trading FX for 24 years but I still feel like a newbie compared to you.
June 28, 2011 at 12:31 pm |
Yra,
Thank you for the blog. New reader here and I’m still trying to figure out- how does this ever get resolved without a default? The PIGS will get screwed and the central bankers will paper over the losses of the TBTF entities involved. Is that what you see?
June 28, 2011 at 12:53 pm |
chris–yes but it will just be a question of the time period and the need of a massive dose of liquidity infusion—deafualt is tricky in today’s world because of the vast amount of CDS