Buttonwood's notebook

Financial markets

The euro zone crisis

Watch the Greeks, not the agencies

Jan 16th 2012, 13:55 by Buttonwood

WHILE the big headlines over the weekend were about S&P's downgrades of European countries, the more worrying news came from Greece, where talks on a debt deal broke up. While I am not as negative as some on the agencies (their record on rating sovereign debt is pretty good), the market had already anticipated a downgrade of France, which has been paying a higher rate on its debt than Germany.

Greece's debt is a complex issue. Clearly, it must default to get its debt-to-GDP ratio down. But it also has a competitiveness problem that requires either a devaluation (not possible within the euro) or a fall in its costs (lower wages and thus a lower standard of living). Some of the pain of the latter option can be cushioned by subsidies from its fellow EU nations but they demand reforms in return. Many of those reforms are opposed by Greeks; it remains to be seen whether the technocratic government can push them though.

Of course, Greece has already had loans from the rest of the EU and this complicates matters further. The authorities are unwilling to see take any write-downs on their money. That puts all the burden on the private sector. Indeed, the more money lent by official bodies, the greater the write-down the private sector is forced to absorb if the Greek debt-to-GDP ratio is to fall significantly.

Throw in another twist. The authorities are obsessed (rather perversely in my view) with making the agreement voluntary so that the Greek deal is not classed as a default in terms of credit default swap market. That gives the creditors a bit more bargaining power. The banks appear likely to go along with whatever they're offered but the hedge funds are putting up more of a stink.

Talks between Greece and its private sector creditors are due to resume on Wednesday, January 18. Whereas a tentative deal was reached in October to write the debt down by 50%, a lot depends on the interest rate on the new debt. The lower the rate, the better for Greece but the bigger the hit (in present value terms) to the creditors. And then there are the knock-on effects. The EU has said that the Greek deal won't set a precedent for other nations. But, pull the other one. The EU has said a lot of stuff during this crisis and has backtracked many times. The bigger the write-off for Greece and the more aid (in terms of cheap finance), the more other nations will be encouraged to default and the greater the worries of creditors of other nations. That's why the Greek deal (or lack of it) is so crucial.

UPDATE: On the issue of the agencies being behind the curve, here is the result of an analysis by Gabriel Sterne at Exotix

We too have been repeatedly critical of troubled European sovereign ratings as the crisis has grown; we think they have been much too lenient! Our views are based on a simple but systematic assessment of the statistical relationship between sovereign ratings and spreads in EM and EA sovereigns. The analysis suggests the agencies rated troubled EA sovereigns 5-6 notches more favourably than do markets [as of 20 December].  Hence we continue to think that EA ratings are way behind the curve in terms of speed and size of downgrades.

Readers' comments

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Ken E Zen

The comments below are astute. The Greek leader Mr. Papademos looked days ago like the cat that caught the mouse. He seems sure to get the monies necessary without any "Real" pain of having to rebuild the private structure and sharply reduce the Government area.
His bet is that banks will do anything in final result because of the Sovereign CDS (Credit Default Swap)positions held by the large financial institutions.

petko-bojmican in reply to Ken E Zen

Greece will eventually get another 80 or so billion and that will be the last money handed. If it does make it will be up to the Greeks in how endurant and how determined they are, and up to the markets in how aggressively they react. The country will hit the rocks at some point and it will be quarrantined for a while (pegged to the euro but out of the zone of transactions). The Greeks will have to live with minimal imports so cash outflow is limited. They'll have to come by with domestically produced goods and on whatever revenue comes in during the warm six months of the year. Whatever defecit in vital goods, will be offset with special non-monetary commercial agreements (oranges for petrol) which will have to be the norm. The euro will be the country's currency until they run out of euros, time when the new currency will be introduced, by which time everybody will be prepared and ready... Science fiction??? If the Greeks are strong, they'll make it

sanmartinian

To those in other threads who have questioned the applied maths assertion that the demise of the Euro would hit hardest London's foreign exchange markets and second hardest NYC's.

The above assertion is a purely maths application totally devoid of emotions.

It is understandable that those unfamiliar with maths techniques fail to understand the reasoning.

Maybe a completely unrelated and unconnected chain of events will help them get the point.

Goldman Sachs has just announced a tumble of over 50% in their profits.

Although mathematically not linearly connected, this is in line with many hedge funds having lost half of their assets and at least one sizable one having gone belly up. Exactly the one led by an ex- Goldman Sachs executive.

This is clearly connected with bets on Euro (the MF Global bankruptcy was so explained).

Will that help to understand that Euro's difficulties will affect very negatively operators in two largest foreign exchanges in the world? (London 37%, NYC 18% of total)

sanmartinian

To those in other threads who have questioned the applied maths assertion that the demise of the Euro would hit hardest London's foreign exchange markets and second hardest NYC's.

The above assertion is a purely maths application totally devoid of emotions.

It is understandable that those unfamiliar with maths techniques fail to understand the reasoning.

Maybe a completely unrelated and unconnected chain of events will help them get the point.

Goldman Sachs has just announced a tumble of over 50% in their profits.

Although mathematically not linearly connected, this is in line with many hedge funds having lost half of their assets and at least one sizable one having gone belly up. Exactly the one led by an ex- Goldman Sachs executive.

This is clearly connected with bets on Euro (the MF Global bankruptcy was so explained).

Will that help to understand that Euro's difficulties will affect very negatively operators in two largest foreign exchanges in the world? (London 37%, NYC 18% of total)

sanmartinian

For those interested in the cross holdings of rating agencies ownership please read:

http://2013rainbowroundtable.ning.com/profiles/blogs/who-owns-standard-a...

It's obviously a soft (or harder than I think?) left piece , but it gives a good and convenient summary of cross holdings.

I checked a few and they are right.

The power of almost unknown Capital Investments is simply amazing.

Ownership of ratings agencies has become as potentially criminal (effectively?) as insider trading.

Will all honest believers that market economies are more efficient and just than centrally planned ones, join to promote honesty in the credit rating industry?

As it is, we'll soon have another collective backlash and maybe a repetition of the horrors of Russia in 1917.

Or, perhaps worse, WW2.

Bishopson

Using GDP ratios as targets is very dangerous and silly. Targets are supposed to be stable and attainable but such ratios are not. Greece’s problem - therefore directly that of Europe and eventually also of world markets -stems from different but connected problems. Austerity measures depress the value of GDP by the drop in domestic demand without any significant gain in net foreign demand while shrinkage in the budgetary deficit will be limited by falling revenues. It is the Troika’s measures more than anything else that is leading Greece to default and exit from the Euro zone. If the Troika folk are not part of the solution then they are part of the problem
Greece's problems: (i) the long term reluctance of Greeks and their governments to change, (2) fatal delays not only because of lack of political will but also because of an entangled bureaucracy in which e.g. tax flies are stored in plastic garbage bags. (3) The fact that too many politicians in Greece are self-serving; top cabinet ministers often refuse to take responsibility for serious mistakes or bad management that occurs in their divisions. Quite apart from the small yoghurt tossing crowds most Greeks don’t respect and trust their politicians any more.
The Eurozone's problems: (i) the domination of German interests over others; a prolonged recognition lag of how serious the Zone’s problem is (2) an even longer decision lag because of the many involved; (3) a bureaucracy that is nearly as bad as in Greece; (4) lack of political will and a “Me and my country first” syndrome.
The Troika''s problem : Beware of men in suits carrying laptop bags who shake one’s hand and say:” Good morning we’re here to help you”. The IMF team : Essentially technocrats more akin to accountants and tax inspectors than to economists; a mentality based on an outdated and oversimplified system of macroeconomic analysis, i.e. the Polak model designed in 1957 to provide a simple guide for administrators when the main role of the Fund was to manage a global fixed exchange rate system.
IMF Team's Problems: Confrontational referee style and hubris when facing troubled IMF members; most of us agree that budget deficits must trend toward absolute zero over time. Alas those means urged by the Polack-inspired Troika have led directly to a sharp drop in economic activity with an adverse impact on revenues. Economists can foresee this dynamic, most accountants can’t: “Raise taxes cut spending is all” they chant. The drop in internal demand, as in Greece, causes sharp falls in VAT receipt s (higher VAT rates and income impact of measures), is worsened by higher income taxes, a new penal property tax, wage and pension cuts as well as rising unemployment.
Social Contract and Justice Consequences: Most Greeks own their own residences so the new hefty property tax added to the power bill is the last straw. Some faced with cutting back on groceries can’t pay it and risk their power cut in an unusually cold winter. Greek leaders have been obliged to violate the national constitution in dissolving labour contracts and tying power supply to payment of property tax. Many public staff has lost their positions and most of those will permanently lose their jobs. Wages have been cut as have pensions and further cuts are being urged. There is talk of scrapping the 13-14 month bonuses. Not a bad idea in good times but disastrous now. Leaders have interfered in the labour market but most final prices lack control. The fuel tax increases as oil prices rise and power rates have increased. A higher annual motor tax has led to thousands relinquishing their licence plates, leading to a fall in proceeds. The middle and working classes bear the brunt of the reform measures. Not a good sign for social stability.

Mario53

A dialogue
heard this morning on the London underground:
1st banker: What news, Mylord?
2nd banker: None, Mylord, except that S&P's grown honest.
1st banker: Then is doomsday near!

sanmartinian

Buttonwood, whom I mostly find myself in agreement with, wrote:

"While I am not as negative as some on the agencies...

That rating agencies find themselves often behind the curve and can be lenient (remember Lehman Bros or AIG), nobody doubts.

That's not the problem.

The problem is that rating agencies (mostly the two American ones; Fitch is "Frencher" than French fries) issue ratings to the benefit of their shareholders.

It took ages and the Great Depression for Insider Trading to be made illegal and even longer to provide deterring penalties for it.

American Rating Agencies are mostly owned by operators who can profit enormously from their ratings: for instance,Berkshire Hathaway own 12.4% of Moodys; so does Capital investments that also owns directly the same share in Standard&Poors; apparently (couldn't check it today owing to Wikipedia's blackout I support) Capital Investment partly owns McGraw Hill, the other even larger shareholder in S&P.

So Capital Investment probably controls the whole American rating business.

This is far more damaging than Insider Trading ever was in fairness, honesty and capacity to distort markets.

How long will it take American, British and EU authorities, the most affected markets, to take similar action against rating agencies market distortion?

Another World Depression?

The present situation, a typical "quod custodiet ipsos custodes?" matter, makes for crises (the present one has been much worsened by it) and the scandalous influence of organized crime and political groups in big finance.

If I may joke on a serious matter, if you don't act quickly I'll black out my posts as Wikipedia has just done.

Then you'll see what real suffering is....(any suggestions that reading my posts is the real suffering will not be welcome).

Valli2

Let´s face it: The three big rating agencies have as they should lost all credibility after their much too optimistic rating of derivatives based on subprime mortgages in the US. Those agencies should cease to exist. They are a malice and a large part of the problem. I am not saying however, that Standard and Poors´ were wrong in lowering the credit ratings of the eurozone countries. There is however no trust any more in their evaluations. Those who trust them, on the other hand do so at their own peril.

devasagayam

The downgrade is irrelevant.

Complex issue is not Greece's debts.It is in public domain.

Complex issue is how many banks and speculators will go bust if Greece leaves EU.

Complex issue is how many trillions of public monies they will they extract from the willing Govts threatening financial ruin of all.

guest-iisjssm

well there is a lot of talk about the Greek dept but up until now no serious research has been done (sorry to say).
what is this dept really, when was it created, what is it consisted of, with what rates, to whom, is it legal.
no one has done this report (it would take less than a page to write), not even serious establishments like yours. all we get is a mix of half information with sentiment pro or against Greece, low standard journalism i call that.

Dimitriosph in reply to guest-iisjssm

A very productive and honest approach.
Yes, it is a low standard journalism of course but mainly is a lack of responsibility of the appropriate authorities of the European Commission and other including European Parliament to find out and inform the public.

DylanatStrumble

If hedge funds have bought debt at 25 cents to the Euro, how can they complain if they get back "only" 50 cents on the Euro ?

Sounds like far too good a deal to me.

pedrolx2

why is no one allowed to criticise the Ratings agencies? Why is it that everyone who does is heavily played down by the international press. When the international press DOES criticise them, is the good-old criticism of being 'behind the curve'. Ouch, that must really hurt the rating agencies.

Every government, especially the ones who the international press calls pigs as term of endearment, who even dares to utter a slight criticism of the ratings agencies is immediately slashed by a press article saying in between the lines : 'How dare you criticise them, yuo dirty little pigs?'

Are we truly living in the world of the ratings agencies dictatorship?

Afterall, they've already set the policies Europe, the US, England, have to follow.

Soon there won't be any need to cast votes? for what. Even if you vote for something different, there will be S&P or Moody's telling you off 'that's not the way to do things', so you're downgraded to junk. say goodbye to your economy.

Wow, what a marvellous system we live in!

Congrats, Anonymous Buttonwoods, for defending this outstandingly democratic system!

LibDem Curmudgeon in reply to pedrolx2

It would be emotionally satisfying to tell the ratings agencies that they have about as much credibility as a toddler with its hand caught in a jar of sweets claiming that it really wasn't after the candy. It would also have the ring of truth, given their light treatment of CDOs. But that's really not important: the problem is that the people who lend the money to governments still believe what the agencies say, or rather, take what they say into account. Until such time as an alternative emerges (new agencies?), it's futile complaining about it.

pedrolx2 in reply to LibDem Curmudgeon

Thanks for your comment. In my opinion, it's never 'futile' to complain about something you believe to be wrong.

In fact, going on - It's astonishing that these people have the nerve to tell governments how they're supposed to implement their policies. How dare they? We're talking about a set of private investors who are now telling governments what to do. A complete distortion of the democratic systems we all praise and value in the west.

Why do we have democracies then. Put these agencies in charge of the countries they rate!

I mean, just read their press release on the most recent downgrades. They set up what the policies of Europe should be. Some of it is actually ideologically biased. It's difficult to understand if they're giving 'advice' or actually 'threatening to take action' if those policies aren't followed. What happens if Europe or countries inside Europe don't want to follow those policies? Why should they have to?

Who's more powerful in a democracy? The elected government, or a group of unelected private investors?

LibDem Curmudgeon in reply to pedrolx2

I think you may be missing some of the point I was trying to make: the democratically elected representatives to which you refer want to borrow money. In order to get that money, they need to persuade private investors that their investment is a good deal. The investors do their checking as you'd hope they would, as many times they're investing money for things like retirement funds. The ratings agencies are a source of information by which they can make a judgement.

Ratings agencies can be lousy, they can be good; I tend to agree with you that they are lousy. But what is your alternative? Would you suggest as has been mooted that the United Nations sets up one? It's fine to say the agencies are corrupt or stupid: it's certainly true that those who excel at finance tend to go to the banks rather than the ratings agencies. But until such time as there's a practical alternative for which to push, complaining about them won't achieve very much.

pedrolx2 in reply to LibDem Curmudgeon

Ratings agencies provide a service, as such we are all entitled to complain about their incompetence because we actually DO pay to get rated. Much in the same way I would completely tell off my account manager if she kept telling me to put my money on the worng products.

I believe there is a 'monopoly'(or a tri-poly - nothing to do with the city ) of three ratings agencies, which are all ideologically biased, and two of them bent on wrecking the euro for ideological reasons. As with any monopoly, they become political agents, which is not what a company providing you a service should do. They are basically insulting their customers these days.

The only alternative is a very simple one, more competition. As they keep on losing credibility and show their incompetence and political motivations, people and governments will tend to a)give them less credibility b)look out for alternatives in the market.

There are alternatives aplenty. There are Chinese, Canadian, even Portuguese rating agencies. That's how it should work in a free market.

I find it amazing though that no one in the international media has the courage to say things as they are. And they are just as I described them.

Everyyone and everything is subject to criticism.

'Behind the curve'.... puh-lease. What a half-baked criticism. They have clearly manipualted the bond markets, as anyone with a printer and a pencil can denote. Print out bloomberg tickers on Eurozone bond yields and mark the dates in which there were downgrades. notice the evolution. No need to be a rocket scientist to figure that one out. Besides, why the gradative downgrades (one, two every three months... do the economic fundamentals of a nation change THAT drastically in three months?)

They are FLAWED and seem to have become the mouthpiece of the people who own them. For a closer inspection on who actually does own them, have a look on the 'will the euro survive in 2012' blog.

Always complain.

ALWAYS.

:-)

Nirvana-bound in reply to pedrolx2

Like you pointed out, these CRAs are mere mouthpieces of their self-serving, opportunistic owners & benefactors & have lost all credibility. THey desrve nuthin' more than "FFF" ratings, themselves! I say, close 'em all down, to stop the damage they have been wreaking, globally.

lecycliste

I suspect there is an unreported story as to why they are so concerned not to trigger credit default swaps. Likely not a nice story.

Der Perfesser

At last! The Economist has at last said that Greece must default and leave the Euro. The magazine has not spelled out, beside adverting that the present situation is too difficult to sustain, why it is good for Greece to do this. It is because in two words, devalue and inflate. Leaving the Euro allows Greece to devalue the Drachma, or whatever they call the new currency, and so become more competitive. Inflate so they can continue to make politically difficult expenditure cuts by continuing payments in nominal terms, but increasing only the vital expenditure in real terms. Greece must reach a fiscal surplus without delay (multipliers, crowding out).

I don't wish to crow, but this is what I have been repeating over the past twelve months.

The second issue raised in this article is the untrustworthiness of the ratings agencies. S&P has reduced ratings by one point, but Moodys and the rest not at all.

This is not ho hum. It is a core issue. Banks and many funds are prevented by their rules and in some cases legislation from investing in Bonds with low credit ratings. Often there is a cut-off at AAA. As soon as the ratings are reduced, many organizations are prevented by their own rules investing in Euro bonds.

A responsible fund manager would make their own credit assessment, and most would have ceased investing in Euro bonds a long time ago.

The last time I checked Moodys and Fitch still not have reduced their ratings. This gives many banks, indeed all the Euro banks, the excuse to continue to invest in Euro bonds, and they continue to do so.

Why would they do this? This schizophrenic behavior, where one side of the bank, the credit supervisors, tell the bank bond traders to stop buying, and the other, the board and the investment side tell the traders to continue to invest, displays among other things that the banks are not run for the benefit of the shareholders or even the depositors. To put it cynically, the bank directors prefer to continue to have lunch at the Elysee Palace, than look after the bank's interest, which they confuse with their own interests.

The banks are continuing to buy bonds which they know are right now worth much less than they are paying for them.

This situation is extremely alarming for the banking situation, to say the least. We now go onto to capital maintenance and Basle III. Under the Basle III rules banks have to retain certain levels of capital. If they make big losses on their Euro bonds they will not be able to do this. They will certainly call on their governments to "make it up".

There is no such thing as a free lunch. Keeping the credit ratings excessively high encourages banks to buy more bonds. They will inevitably make large losses on these bonds. They will then pressure governments to refund their losses.

Do the Basle III capital requirements make good economic sense? Well, that is another story. The liquidity requirements certainly do. But all these things are tied together in the tentacles of an octopus. The Euro governments cannot avoid the eventual economic consequences of their actions and inactions.

Nirvana-bound in reply to Der Perfesser

Spot on! I could not agree more. Greece & other floundering euro-zone nations need to disengage themselves from the Euro bandwaggon, a.s.a.p. & return to their individual/national currencies, if they ever hope to survive the current meltdown.

And like I commented earlier too, time is of the essence. The longer these collapsing economies delay the break from the Euro, the longer & harder it will be to recover..

Dimitriosph in reply to Nirvana-bound

But who are you that takes the right to judge the others when you are afraid to reveal yourself? Leave Greece and the other floundering, as you say, euro-zone nations to have their struggle done. You remind me that priest who his deeds are different from his teachings.

Der Perfesser in reply to Nirvana-bound

I should explain further that the absolute central core of Europe's problems is not Greece's problems, even the current size of its debt and whether it can repay it, but the continuing sale of Euro bonds by all the EU countries, and the banks' continued purchase of the same.

The EU countries are addicted to fiscal deficits. All of them. These deficits are actually harming these nations, forcing them further into depression. As I have explained in another blog, deficits cause downward 'multiplier effects' and 'crowding out'. The bigger the deficit the worse off a country becomes. They all need to have a fiscal surplus - now - to get out of their recessions.

But they won't do it. As I said, they are addicted to spending.

So what would happen if the banks stop buying their bonds? Immediate fiscal 'cold turkey'. They would be forced to cut expenditure as they would not have enough money to spend. They can no longer borrow by selling Euro bonds.

Unless they can persuade the European Central bank to 'print money'. But as Angela Merkel well knows, that is the road to hyper-inflation.

How do you get these EU nations to stop selling bonds? Very simple. Reduce their public credit ratings. Then buyers will not buy their bonds.

Banks and funds go be 'rules'. They go by the credit ratings published by S&P, Moodys and Fitch. (Not by their private credit assessments, which are far, far, below the published credit ratings. Any responsible credit officer would be mad to authorize purchasing any EU bonds based on their private assessment). If ALL S&P, Moodys and Fitch reduce their credit ratings, the money tap gets turned off. Starting with those buyers prohibited from buying below AAA, to below. (Note, NO EU countries' credit ratings are nowhere near AAA in reality).

At the time of writing, while S&P has reduced most EU nations' credit ratings by one notch (in reality a move which is too little and too late) Moodys and Fitch have not moved at all. This is a joke.

BUT while these ratings remain at these totally undeserved levels for these two companies, these are 'official' credit ratings; and the EU countries can continue to sell their bonds and continue to run deficits.

So the solution to the EU crisis has now narrowed down to one tiny decision maker - Moodys. If and when they move and reduce the EU credit ratings, the Euro bond market will tighten up and the EU countries will be FORCED to balance their budgets. If Moodys and Fitch do not reduce these credit ratings they won't. And if the EU countries do not balance their budgets, the EU will continue to struggle in the mess it is in. And continue to accumulate a monstrous and un-sustainable debt.

Nirvana-bound in reply to Der Perfesser

Your reasoning is dead right. Anyone with an ounce of commonsense will see the verity & cogency of your synopsis. So how come the powers-that-be fail/refuse to acknowledge these grim truths?

It's scary & troubling to watch these so called Credit Rating Agencies continue to play 'Blind Man's Bluff', by not drasticaly lowering the ratings of ALL the euro nations, to where they truly belong.

I can't help but wonder, what sinister hidden agendas prevent them from exposing the harsh & sobering realities. But how long can they, or the authorities continue pulling wool over the eyes of the world?? Denial can only work so long..

I forsee the break-up of the euro, looming over European skies.

pedrolx2 in reply to Nirvana-bound

you DO realise that the economic fundamentals of certain nations are much WORSE than those of euro nations and the rating agencies do nothing about it don't you?

Or have you any evidence for what you're saying? Easy to say things out of the blue. I can prove what I said to you above.

Nirvana-bound in reply to Dimitriosph

Suffice it to say, some may see me as the 'oracle of truth' & some others as the 'harbinger of doom' - depending on their then state of mind! Most readers, I'm sure, don't see me for anything more than, yet another 'voice in the wilderness' - at best! (Wishful thinking?!)

Happy reading!

Der Perfesser in reply to Nirvana-bound

It is noteworthy that immediately after the Moodys announcement that it maintained France's credit rating at AAA, France issued and sold some 10.3 billion Euros worth of Bills and notes (short term bonds). The French officials crowed that the issue was 'extremely successful at a low rate'.

I won't divert onto the probability that this money was probably sourced by the ECB printing money, which will very soon be followed by a further fall in the Euro FX rate (and increased inflation in 6-9 month's time).

No, my main point here is that Moodys' inflated ratings have allowed the French government to continue their riotous and un-abated spending habits. This is harmful to France and the French people. They must have a fiscal surplus now.

Furthermore, and probably this point is even more important, Moodys' inflated ratings have ALLOWED the banks to make what is, from a basic solvency point of view an appallingly bad investment, which will almost certainly in very short time (months at the most) prove to be almost un-collectable. (Or rolled over at a much worse rate).

As readers of my previous blogs may have realized, I have a very low opinion of the intelligence and competence of all bankers. They may think themselves clever, but experience has shown time and time again they are just ignorant and greedy. And greed and stupidity go together. Any banker who makes investments based on official ratings is inherently stupid, and the culture of the bank which allows that to happen is inherently defective.

If I may get philosophical, it was Lenin who called a certain class of businessmen "rope sellers" because they rushed to sell you the rope which would later hang them. As an economist I will make a not very difficult economic prediction. Within a year, as a consequence of their defective Euro bond purchases, a number of major banks will be hanging by their necks with their legs kicking.

Nirvana-bound in reply to Der Perfesser

Deja vue! You & I think so much alike, we could be identical twins from another mother!! Maybe we should get together for a final drink, before the sky comes crashing down over Europe!

But jokes aside, I forsee a grim & sombre 2012 (& beyond), all across the western hemisphere. We are all nations in abject & catatonic denial..

Lord have mercy.

4horseman in reply to Der Perfesser

As to why..?: The banks do not need to mark the bonds to market if they maintain they will hold them to maturity. So it's not a concern from the standpoint of adequate regulatory capital. Your question is a good one, but I'm just trying to explain how the world looks from inside the mindset of the bankers. Also, they are buying the bonds of the national government that regulates them. Also, the banks make markets in these bonds. Much of US gov. debt goes initially to 20 some "primary dealers" (ie. 20 large banks) who peddle it. Much the same in Europe. So the banks support the government & the government supports the banks.
Now suppose a French bank gets stuck with defaulted Greek government bonds. The French gov. recapitalizes the bank with 10 Billion Euros, Then the bank buys 10 billion of French gov. debt. The government is not out anything net (or in cash flow).The bank is now "made whole". Remember that the government gets to define reality in certain respects.
I hope you see I regard this as a scam. But it's important to understand why bankers engage in this behavior because then one can see they will persist. There is a pathological co-dependency between banks & governments. The parties to such relationships don't use those terms to describe them.

Wolf K

Anyone who understands basic economics knows that Greece must default and it's already been explained here why. The markets have known that for some time.

What the markets have also learned is that europe is as incapable of actually dealing with a problem as it was in the last century and that it prefers to dither with surreal wish fulfillment to achieve peace in our times. Different twits, different situation, same tactics, same strategy.

Merkel's insistence that the real solution is to get their houses in order and actually have a mechanism that has some power to enforce agreements is horrifying to the duchies who's counter strategies involve printing money highways and likely even larger shoulder epaulettes to show people who's boss.

The spin that austerity measures (read stop borrowing more to pay for things you can't afford) causes a downward spiral can be countered by the fact that by going through that pain which is real you will eventually end up in a sustainable place. By lending more to entities that not only have never faced the idea of sustainability; but, have also lied through successive governments so they could avoid it - you can delay the inevitable and face it when the problem is larger and you are weaker.

Checkmate. Default in Greece.

modernpublius

Why doesn't Greece get out of its debt by selling territory? I am sure some of the islands would fetch a nice price from the EU, not least to prevent the Chinese from buying them. It would be interesting.

Nirvana-bound

In my opinion, the only way out is for the euro to be unequivocally dismantled & all the euro-zone nations to revert to their own individual (national) currencies - like in the past. That way the economic collapse can be localised & limited to the most vulnerable (culpable?) nations. Otherwise, all Europe will - sooner than later - be dragged, inexorably down the self-destructing 'euro' quicksands.

Time is of the essence & only time will tell..

Luftwaffe

"The authorities are obsessed (rather perversely in my view) with making the agreement voluntary so that the Greek deal is not classed as a default in terms of credit default swap market."

Well, it is known who holds the greek sovereign debt.

On the other hand, nobody knows who holds the CDS, were these CDS repackaged by the big casinos, were these repackaged instruments sold again...

Essentially nobody knows who will foot the bill at the end in case of default.

And so far it seems nobody really wants to find it out cause they are afraid of another AIG moment...

Dimitriosph in reply to Luftwaffe

Luftwaffe: The name of German Air Force until the end of the Second World War, when Turkish Air Force those days was flying in formations with Nazi against alliance's aircraft from the countries occupied by Nazis Germans and Turkey was their great alliance.
As per CDSs be advised that these financial instruments are highly vulnerable to the insider information and are mainly bets and not instrument because do not have certificate of ownership.

Dimitriosph in reply to Luftwaffe

Lutwaffe, the German Air Force until the end of the Second World War, when Turkey's aircraft were flying along with the Nazis another name of Germans criminals bombing targets of allied areas.
As per CDSs be advised that the so called financial instruments are bets and not instruments (fundamental financial engineering/gearing) because they have not cerificates of instrument because no one can provide certificates of ownership. They are highly vulnerable papers their use should be along with the bonds they hedge, otherwise they are Naked.

Luftwaffe in reply to Dimitriosph

"Luftwaffe: The name of German Air Force until the end of the Second World War"

Nope. Even today the air arm of the Bundeswehr is called Luftwaffe.

"when Turkish Air Force those days was flying in formations with Nazi against alliance's aircraft from the countries occupied by Nazis Germans and Turkey was their great alliance."

Whoa, nice delusion :)

For your information, Turkey was neutral in WWII.

Dimitriosph in reply to Luftwaffe

@Luftwaffe,
Whatever refers to Nazis has been globally condemned, please, read: In February 1935, Adolf Hitler ordered Hermann Göring to establish the Luftwaffe, breaking the Treaty of Versailles's ban on German military aviation. Germany violated the treaty without sanction from Britain, France, or the League of Nations, and neither the League nor either...
As per common flights of Germans and Turks during the period of nazism you should have to read some history of the WWII. You should have to get some inspiration from Winston Churchill's monumental praise of the Great Britain Royal Air Force, "Never before in the field of human conflict do the so many owe so much to so few" denoting by "few" the British pilots.
As per Turkey's neutrality during the WWII you are absolutely wrong. I kindly recommend you to read a book of an American professor of Yale University captioned "The Evasive Neutral" to find out what was Turkey's contribution to the free world. The only thing I will tell you the date of declaring the war axis against to axis forces just to be eligible of participating in the then organizing UN. They declared the war on February 7, 1945 just one day before the Yalta convention while USA on Sept of 1942 and most European on 1940

jackvandijk in reply to Dimitriosph

Dimitriosph and Luftwaffe, all this is in the past, and yes Luftwaffe, your nickname is not a nice one, but it is a nickname.
Dimitriosph, I assume that you are a Greek, tell us how you think the Greek population will react and cooperate.

Dimitriosph in reply to jackvandijk

The Greek people is highly disapponted from its political leadership and the system, which is structured on the favoritism and nepotism.I think this the main reason of the bad situation. Yes, they have elected by the Greek citizens and they have too their share of responsibility but equally responsible are some so called European authorities.
As per population, you ask, they are obliged to obey by any means and "cooperate".
As per the reaction it depends on the leaders of the ones who resist and will get the leadership. The syndications are not the proper persons to lead the way.

jackvandijk in reply to Dimitriosph

That is a gloomy forecast. Now according to a quote from Professor Krugman, (America's) political culture has become not just dysfunctional but deeply corrupt.
My own opinion: America is and Americans are deeply dysfunctional.
However, there is still a lot of wealth in the USA, however misdistributed and thus we will muddle through and things may turn up better, some win, some lose.
How will Greece fare?

Dimitriosph in reply to jackvandijk

Be advised that Krugman, the nobelist along with another nobelist of Stiglits were advisors of George Papandreou, the then Greek PM, who along with other advisors at the number 178 have made all that mess up of the Greek economy after the elections of October 4, 2009. Yes, Professor Krugman quote is correct, and your point for America is aboslutely correct. Yes, there is still a lot of wealth in the USA and in Europe as well which is misdistributed. I think Great Britain or UK or what ever called MUST tackle the horns of the ox and lead the way of EU resembling the paradigm of Winston Churchill. Great Britain only can inspire a Pan European Leadership and make the right thing as it did during the WWII. Germans , French and other EU cannot inspire that kind of leadership that is presently required.
As per Greece you are asking me, I am optimistic and with that technocrat PM we will manage the so bad situation.

SOC1

I wonder why people are still talking about a 'voluntary' deal. Regardless of the current impasse. Reasons = (1) We already know that Greece needs "near universal' participation; (2) We know that a large contingent of bondholders will not participate voluntarily; (3) The Troika and ECB will not offer any new funding

THEREFORE this is almost certain now to be a coerced or forced deal (through Greece changing its national laws etc) that will trigger a default and CDS contracts leading to severe contagion to other EZ peripherals.

About Buttonwood's notebook

In this blog, our Buttonwood columnist grapples with the ever-changing financial markets and the motley crew who earn their living by attempting to master them. The blog is named after the 1792 agreement that regulated the informal brokerage conducted under a buttonwood tree on Wall Street.

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