Greece's debacle

[finetrader]

http://finance.yahoo.com/news/Merkel-warns-against-Greek-apf-2594870427.html?x=0&sec=topStories&pos=4&asset=&ccode=

 

 

Imposing a so-called haircut on Greek debt -- reducing the amount to be repaid -- would endanger not only banks and other creditors who hold Greek bonds, but also institutions that sold insurance policies against a default, Merkel said.

 

Those credit default swaps have a "significantly higher" face value than the debt itself, and the consequences of them being called on can't be foreseen, she said.

 

Now I can see why WEB called them weapon of mass destruction.

 

[Kraven]

http://finance.yahoo.com/news/Merkel-warns-against-Greek-apf-2594870427.html?x=0&sec=topStories&pos=4&asset=&ccode=

 

 

Imposing a so-called haircut on Greek debt -- reducing the amount to be repaid -- would endanger not only banks and other creditors who hold Greek bonds, but also institutions that sold insurance policies against a default, Merkel said.

 

Those credit default swaps have a "significantly higher" face value than the debt itself, and the consequences of them being called on can't be foreseen, she said.

 

Now I can see why WEB called them weapon of mass destruction.

 

 

In the wrong hands, indeed they are.  As with any tool though there are legitimate uses for them.  But in the hands of traders and bankers who live by an IBGYBG creed, they can be disastrous.

[Partner24]

Those speculators? Good riddance. The government (that's people taxes) cannot always have to pay the price for the crazy-cowboys-at-las-vegas excessive greed.

[dcollon]

It continues to amaze me that the regulators are struggling with CDS problems.  It's pure madness.

[Kraven]

The sad truth is that the regulators are, in general (with a few exceptions), just not as smart or savvy as the people developing and implementing these instruments.  They are always at least 2 steps behind.  It makes sense if you think about it.  Whether you are at a financial institution or regulator and are going to be working with these things, you have to have some interest in it.  So who chooses to work for the regulator making maybe 5, 10, 20 or more times less than the business person?  Often it's someone who wants to work less, although at many of these regulators people work like dogs.  Literally worse hours than some of the business people.  So it's usually the person who would have chosen the business spot, but can't get it.  Not always of course, but many times.  There are definitely those who want to "do good" and don't care about doing well.  The regulators are very good at regulating what has happened in the past.  We can be relatively confident that a mortgage driven meltdown won't occur again.  Of course each meltdown is unique in its specifics.  So while they regulate what has happened in the past, they are very bad about being forward looking and determining what might happen in the future.

[dcollon]

This was one of my favorite lines in the article:

 

"Nobody around the globe knows exactly who holds those papers and what it means if they come due," Merkel told a meeting of the German parliament's European affairs committee. She said it was also unclear "who will have to pay how much and who will need fresh capital in what way."

 

 

[Parsad]

More on credit derivatives related to Greece.  Good article!  Cheers!

 

http://www.nytimes.com/2011/06/23/business/global/23swaps.html?_r=1&src=me&ref=business

[libor.plus1]

Italy's banking governor was just named as the next ECB chief the same day the rating agencies lowered Italy's banks credit rating. I don't think we have anything to worry about now.

[finetrader]

omg. people who hold bonds might not get 100% back on the dollar. notice that everybody wants a bailout? they bought greek debt. let me say it again. they bought greek debt.

 

Maybe like you say they are exagerating the problem just to get a bailout.

[Hawk4value]

"...people who hold bonds might not get 100% back on the dollar. notice that everybody wants a bailout? they bought greek debt. let me say it again. they bought greek debt...."

 

These European politicians do not give a dam about the people or the banks or anyone else. They want to get re-elected and hold on to power. In order to do this they cannot allow the system to clean itself out in one shot and create what would be a chaotic situation for maybe 12 to 18 months. So they print money, bail idiots out, create enormous deficits, destroy the value of the currency and everyone's wealth, drag the whole mess out for the last 4 years and counting, and systemically weaken the system in the process. People like Sakoszy and Merkel, etc. would be much more helpful if they simply put a gun to their heads and pulled the trigger.

 

[Packer16]

For capital purposes, why don't they treat sovereign debt like corporate debt and require higher capital levels to hold it?  If it is gov't junk treat it like corporate junk.  I don't understand why for derivatives, the regulators just don't require higher capital levels (maybe a % of notional value) to trade in these things.  Simple solutions like these would solve the problem but hit large bank/brokerage earnings hard.  My question is why should we care about bank earnings are when they have proved time and time again that they do not have the self-control or adequate risk control in this area?

 

Packer

[mpauls]

Here's an extra $10billion.

 

http://www.scribd.com/doc/55912797/Fernbank-Letter-to-EU-OPAP-05-18-11

[mpauls]

 

I concede a bit of an odd-ball idea...

 

The Greek Economic Problem:

Europe cannot rationally expect to (truly) recoup borrowed funds from Greece unless such funds are used to enhance the FUTURE productive capacity of Greece.  Naturally, increases in productive capacity must come from increased production of exportable goods and services.  That is, ultimately, if there is to be a real repayment of European issued Debt, Greece must be able to produce and maintain a meaningful trade surplus.  Any other plan will fail.

 

High borrowing costs in Greece will drive down domestic wages, reduce inventory stock piles, and ultimately force general prices to decline.  (This is already happening.)  The [temporary] result would likely increase exports through an effective liquidation of Greek assets.  This is not a long term solution for either Greece or Europe. 

 

Solution: (to the economic problem only)

The European Union might consider providing credit (or a restructuring thereof) to Greece in the form of capital assets.  Such assets of course, should be limited to, profitable, long-term capital assets producing goods exportable to the rest of the world.  The majority of such exports would be ideally sold to non-EU countries, the balance could be made available to EU members at cost (below market) thereby providing those lending nations subsidies not available elsewhere.  All profits would go toward paying down foreign obligations until Greece altogether eliminated their debt.  Unemployment rates in Greece could then be maintained or possibly decreased.  The idea is to promote  economic growth guided by the EU.  The profits would go back to lending nations within the EU instead of back into Greece. This also (sort-of magically) eliminates the problem of an immediate huge negative trade surplus, since in all other cases, Greece would have to borrow money (in the form of Eurobucks) to buy hard-assets with which to produce for export, but if the loan were in a hard (tangible) asset form, then immediately they would produce an immediate surplus.  [i acknowledge that this is somewhat similar to accounting gimmickry and  unfortunately this does nothing about the two other issues, however is the one that really matters in a fundamental sense.]

 

 

[ubuy2wron]

omg. people who hold bonds might not get 100% back on the dollar. notice that everybody wants a bailout? they bought greek debt. let me say it again. they bought greek debt.

[/quote  It makes one want to throw open the windows and shout I'm mad as hell and I'm not going to take it any more. T

[Aberhound]

Great article about the Greek crisis and the extent of collapse of Italian bank shares:

 

http://www.acting-man.com/?p=8269#more-8269

 

For me it is in the too hard pile but someone with Buffett's skils might find a well run Italian bank that will survive.

 

Perhaps it is time to try the Charter City idea in Rhodes and Crete instead of Honduras. A Hong Kong and Singapore in the Mediterranean would give southern Europe's young people something useful to do. Greece should lease the land for a 2% to 6% lease rate (to repay debts for now) instead of selling the land so the taxpayers and creditors capture some of the future prosperity.

 

Greek taxpayers should be given a constitutional guarantee that they can pay past and future taxes with current Greek government bonds at current face value in Euros whatever happens. This will cause the debts to be sold by non-taxpayers to taxpayers and support the price of the debt while increasing domestic support for budget sanity. It would also decrease future tax revenues in the event the government chooses to default making the choice to default less likely. Investors would be attracted as they could buy debt at a discount to cover future tax liabilities.

[merkhet]

http://www.calculatedriskblog.com/2011/07/greece-update-s-says-proposed-greece.html

 

Oops. This makes things a little tougher for the "kicking the can down the road" crew.