Do you even realize what these fucking imbeciles just accomplished? And no, don’t tell me that they bailed themselves out without triggering default. That’s just what they did on the surface.
Beneath the surface, what they’ve really managed to do is totally fuck any chance of having private market cooperation in rolling over their mountains of debt – which last I checked is all coming due, oh…now-ish.
By crushing CDS contracts, these myopic fools have undermined the entire game that is modern bond investors. And not just for Greece. Now, the validity of every CDS contract will be questioned in each scenario where a “special” government is involved.
Italy. Check.
Portugal. Check.
Spain. Check.
Etcetera, etcetera, etcetera.
Who buys insurance when the counterparty can just back out so easily? If this move is held up in court, you can guarantee that a big chunk of the current Credit Default Swap market will dry up and stay dead for the next three decades, at a minimum.
More importantly, who invests in the debt of these places without insurance? You going long Italian bonds when, should they default, you’ve basically just been handing money away to people who aren’t going to honor your claim?
Which leads us to the real problem here. By the ECB getting involved, they have simultaneously driven away all private money that might have otherwise invested in Europe. When a central bank becomes a player, it becomes the only player.
Plenty of the active market is not going to buy long dated bonds of these governments without some insurance. And without private markets stepping in sufficiently, the ECB is going to have to cover the short fall. Which means those who would be otherwise willing to go long bonds without insurance now have to ask, “but will I go long those bonds, naked, while the ECB is printing like mad?” Keep in mind that in the past three months, the ECB has already managed to add somewhere between 1-1.5 trillion euros. That’s more than doubling the number outstanding.
And that’s just to save Greece’s dumb ass while keeping the rest of the zone from the edge of the cliff. But without private money stepping up…well then, the most money they need to drop this year is another trillion. Let’s just leave it at that. It’s two trillion to get you to 2014.
And by then, you’re a year away from the EU banks needing to pony back up their LTRO funds. Assuming they haven’t been given any more, either.
I’d say, 1 trillion in LTRO outstanding, plus 2.5 trillion over the next four years when including the firewall they want (obviously some of the 1 trillion LTRO will go back into euro bonds). Just putting a broad guess out here, but by 2015, I’d say Europe will have dropped another 2-3.5 trillion euros – just to stay current. That’s before we factor in damage that inflation from that money will do to economies, which will harm tax receipts, which will of course make deficits worse. And there is no room in there for any form of “stimulus.” Not even governments backing off austerity (which is failing).
But the end result here is that true private money is not going to be investing much longer in the EU. They will have two varieties of bond buyers. People who have been given money by the ECB, and the ECB.
Which leads me to ask the great question: with the threat of such broad devaluation by means of people not wanting to buy euro denominated bonds, who the fuck wants to be exposed to euros?
Greece was to be the great experiment. It was the first country to be bailed out. And it was an appalling failure. The euro will now be subject to a most terrible burden – people giving up on it.
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I find it bizarre that Corzine lost MF’s moneys to Euro land via CDS derivatives(effectively).
His taking up residence in the south of France (like a traitor – man was a US Senator!), as is usual, the Democrat’s script doesn’t even go near that territory in a waxing political year.
Hahaha I totally missed that. Was Corzine the only one to actually lose betting against CDS contracts?
My understanding is only the brains, “heads of fraud”, get away with the said fraud. It’s the trusting imps who hold the bags; staring at chimps (insert US political class) glaring back.
But I’m in the west coast, I’m sure the spin’s far more glossed EST.
Part of me wishes (only part) that we lived in a world where hedge funds and banks had the resources to properly hold governments accountable for their actions, rather than simply lobbying them for small favors. You don’t want to pay CDS during a default? Fine, we’re just going to buy up a majority of the outstanding Greek CDS and we’ll see you in court.
We’re saying they’re defaulting and we’re not accepting the bonds as collateral, but they aren’t ACTUALLY defaulting. So, there’s nothing to see here.
As the Fly pointed out earlier this morning. Corporate debt, that won’t be played around with by the government if they default, is now safer than any sovereign debt out there.
Economically wrecking a continent over something as simple as a little bond insurance. Ridiculous.
Cain,
watch the EZ politicos mandate that a % of assets (pension etc.) nee to be euro sovereign bonds.
We have entered the end game.
Lol that’d be something. Too bad they already raided those funds though. Take a look at Greek public pension plans.
As long as central banks can print money who needs the private sector?
There are times where I’d prefer to be able to click “cancel order”. How do I sign up for one of these cushy Technocrat jobs where you can erase your mistakes (j/k, I’ve got manblood in the marrow).
Get back with me in July after we’ve had months to witness the private sector folding from this debasement.
I’m not even going to write another piece today. This last one will just stay up, over the weekend.
You can periodically check back, in between watching the euro break.
Have a good weekend.