this web site (main page) is talking about the "Unthinkable scenario", i.e., as soon as they get the $$ from IMF, they'll walk out from EU, not pay a penny to the bondholder, and keep the $$ on both end http://econometricsanalysis.com/
The CDS argument is a red herring, in my opinion. Historically, net CDS exposure after a default is 2%. On 360 Billion in Lehman CDS insured-debt, only 7 Billion was estimated to have changed hands at settlement. Protection sellers and buyers hedge their positions daily and post collateral, which prevents against a large one-time payout - and resulting "domino collapse" - which was the consensus expectation (and mine, as well), albeit incorrect. For that reason, I think bag holders play the derivative card to terrorize Governments into public bailouts. At some point, the game must stop. Banks are holding private markets hostage under the threat of contagion risk - either via systemic balance sheet losses in the case of sovereign debt defaults or credit default swap exposure. I think nationalization is the most workable solution. Central Banks buy distressed PIIGS debt from domestic banks, then let PIIGS fail. In the aftermath, in the nearly unthinkable scenario a large commercial bank failed to hedge their CDS short positions in anticipation of the publicized 'cut-off' date of said PIGG and goes bankrupt, the respective Central Bank would nationalize the debt of that insolvent commercial bank. And that's it. Let them fail. CDS Counerparties to the insolvent bank who actually held, say Greek debt, were already made whole by their respective Central Bank. If they were only speculators, they lost the premium. Which is relatively small. The outstanding creditors to that large bank (other banks) would then be made whole on their loans to that bank to prevent balance sheet losses and another credit freeze. Again, in this way, the idiot banks that don't hedge their CDS positions get isolated, contained, sterilized, and liquidated. Yes, there's moral hazard with the bonds, but we're a long way down that road already. As far as letting the entire system flush and collapse, I agree. I'm a free market guy and all this is bullshit. However, American and European deficits are structural at this point, and systemic banking collapse would hasten a sovereign debt collapse even for countries in the 'worry zone', like the UK, France, America, Canada. This is what all this is about. It's not about Greece or Portugal. But shoring up confidence in global markets, to give the system more time. When America, France, and UK goes Portugal, the entire system will reset and all these debt-fueled Western economies will crash. Like a 15%-20% GDP contraction. Think blood in the streets. But since we're dominated by Keynesians, at least for now, I think this is the best solution. I'm no expert. Thoughts welcome.
What's the alternative? Shall we throw in the towel now? That's fine. I'm all for that. But you and I know the West goes into the blender when that happens. As far as the example, not to nitpick, but those collateralized loans were underwritten by the solvency of the global economy. If some of those loans weren't made, contagion could have brought down the system, making posted collateral of the remaining worth(less). Much less. The intangible benefit (stability) far outweighs the tangible benefit (collateral), whose value was entirely relative to stability in the first place...
I think that's a reasoned approach but glosses over the fact that Greece is already up to her eyeballs in debt, has no way in hell of repaying it, and shouldn't expect to take on more debt, at market rates no less. Maybe instead of ECB underwriting Greek debt, the ECB could tap the Euro Stabilization Fund to carry Greece through restructuring while throwing them to the dogs in the regular bond market. See, the thing is, it's not about the Greek plight. Maybe for their European brethren it is. But from the perspective of a North American, I couldn't care less. Only because I know this horror story will soon be visiting broader Europe and North America. And we'll get no such mercy because the G8 are the IMF. In my mind, anything above isolating contagion risk should be shouldered by the Europeans. And realistically, there is no way Europe and America will avoid an Argentinian like collapse. Does rescuing Greece from economic chaos somehow assuage our fears the same fate doesn't wait for us? And if so, then it's only a psychological mind-game we're playing with ourselves. We need to get real.
Whilst we all might have great ideas about how to fix this mess, frankly, we all know that whilst the bailout card remains on the table, that's the card that will be played... Even if this Greece austerity vote is rejected, they'll pass another one until it is accepted. Then they get the funds they need from the IMF and we can all buy stocks again for another six months. Merkel, Sarkozy, Barroso,... None of these strike me as free market types Staying in power and bailouts is the name of the game. They're "all in" with the Euro dream. A default of one of the PIIGS seems inevitable, but they can delay it for a couple more years for the sake of their own political careers, no problem.
Yes, it's certainly academic, at this point. I don't think the politics of the situation allow for much more sovereign bailouts. The Germans, and to a lessor extent French, are increasingly opposed to bailouts. Which really only leads to the IMF/ESF/ECB. Straight-up monetization. Any why not. Across the pond, it's QE3. With the end of QE2 and the upcoming debt ceiling vote in August, July should be wicked trading. And if America doesn't raise it? Hard to imagine, but it's a real possibility. This house of cards may collapse sooner than we thought...
My preference is for "orderly" defaults with banks taking the hit, subsequent injections of capital into the banking system, and a certain amount monetization and creeping inflation. We need to see which banks made poor investments in Greek bonds. Then the taxpayer should given ownership of these failed institutions. I think we'll get the monetization aspect, but the soveriegn defaults will be too tough a pill to swallow for politicians so they'll find some way of avoiding that until it's impossible. It's certainly not impossible to kick the can further down the road at this point. So the subsequent recovery will be much slower than it could be if they allowed "orderly" defaults because the excessive debt just stays in the system. As I mentioned in another post I think the ideal solution would be create some kind of "two speed Europe" with a new currency issued at a discount to the Euro, and PIIGS debt redominated in the new weaker currency. You could partially back the new currency with gold (10-20%) to give it some credibility. Then the PIIGs could slowly redenominate their debts in terms of the new currency. The new currency would be allowed to depreciate by some small but predetermined amount each year to account for differences in inflation rates between Germany/Austria/France on one side and the PIIGs with the newer currency on the other. Failing countries (in terms of fiscal deficits etc) would be "relegated" to the weaker currency, which would be politically embarassing, but not catastrophic. Hopefully this two tier system would promote better behaviour rather like Eurozone countries cutting their deficits and spending prior to Euro entry. I'm sure others here have good ideas as to the mechancis of how this would work in practice. But a bailout would be more acceptable if there was a longer term plan such as this alongside it. Hey another currency to trade would also be great for us traders!
Yes but once Trichet's gone, we get that Italian dude in charge... How the shift in stance transpires over time might not be so obvious. Perhaps they change the way CPI is calculated, i.e. change the basket of goods included. House prices in much of Europe seem high relative to incomes, so you could give house prices a bigger component, same with cheap electrical goods. Less room in the basket for food and energy. Or greater emphasis being on the 2% target being a "medium term" target, similar to the Bank of England policy. Re-focus on "Core" CPI, just like BubbleBen does in the US... Many ways to go from 2% to 4-5% inflation.