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European Commission To Back CDS Trading Ban As Second Round Of Strikes Cripples Greece; Greek GDP Now Expected To Miss Worst Case Scenario
The Washington Post reports that the next "Lehman-sized" event may be just around the corner, as the European Commission is now supporting a ban on trading sovereign CDS. While we are in process of tracking down whether this is actual news or just some exaggeration based on semantics, we will caution, once again, that the consequences of a CDS trading ban will be severe and very likely result in the opposite of what the EC intends on achieving. Keep in mind that everyone expected the Lehman bankruptcy to be contained as it was at best a fringe cog in the financial system. The result was a systemic collapse as one interlinked component of the financial fabric imploded after another. The rush to unwind CDS positions ahead of a ban will be massive and have unpredictable consequences. But the biggest threat is what happens to bond prices, which once basis trades are made impossible, will be promptly unwound, leading to pervasive selling of the cash leg not by speculators but by plain vanilla mutual fund idiot money. What scapegoaters seem to forget is that the vast majority of existing sovereign CDS notional is tied into perfectly boring insurance "basis" trades, in which the bond is held in combination with associated CDS. Once there is an inability to have hedged cash sovereign exposure, the demand for European sovereign paper will plummet, achieving precisely the opposite of what the CDS ban is attempting to accomplish.
According to the WaPo:
The European Commission said it would back a proposal to restrict trading in a type of financial instrument, known as a credit default swap, that is linked to the prices of government and corporate debt... "Europe and America must say 'enough is enough' to those speculators
who only place value on immediate returns, with utter disregard for the
consequences on the larger economic system," he said. "An ongoing euro
crisis could cause a domino effect, driving up borrowing costs for
other countries with large deficits and causing volatility in bond and
currency rates across the world."
And far away from financial innovation land, Reuters reports that an approaching hurricane of another round of paralyzing general strikes is about to lead to a drop in Greek GDP that will be worse than even worst-case prior expectations, leaving the rating agencies to scratch their heads what excuse they can use this time to avoid downgrading a flailing Greece:
The Greek economy is set to shrink by more than expected this year,
the government said on Wednesday, as it braced for nationwide strikes
protesting its plans for bringing the country's budget deficit under
control. Greece, grappling with a
ballooning deficit and a 300 billion euro (272 billion pound) debt
pile, told the European Union that 2010 gross domestic product (GDP)
would "most likely" shrink by more than the 0.3 percent currently
forecast. It also said the drop may
exceed an alternative, more pessimistic, scenario published in Greece's
Stability and Growth Programme in January envisaging a 0.8 percent
contraction. Economists and ratings agencies
have warned that a sharper than expected slowdown in the economy is one
of the biggest threats to Greece's commitment to cut its budget deficit
to 2.8 percent of GDP by 2012 from close to 13 percent last year.
So even as ECB is preparing to launch its own rating agency so it can avoid the risk that Moody's grows a consciences and rates Greece at or about the proper rating of CCC-, just so Greece can pledge its bonds as collateral in perpetuity regardless of how sever its default will ultimately be, it will be tough to place the blame for the next massive round of Greek strikes on CDS traders. And massive it will be. The BBC reports:
Greece is expected to grind to a halt for the
second time in a month as hundreds of thousands of state and private
workers stage a general strike. The stoppage is in protest at the country's austerity measures. More groups of workers are staging industrial action and officers
from the police, fire and customs services are planning to join the
street protests. Greece's links to the outside world have been severed. Air
traffic controllers have closed the country's airspace for 24 hours and
ferries are stuck in harbours as maritime unions join the strike.
The amount of economic output loss daily will be staggering and will have ramifications for 2011 GDP which will certainly come double digits lower than presented in whatever rosy forecasts Greece may have shown to Trichet.
And instead of focusing on how to avoid what may ultimately culminate in civil war, Europe's fringe countries continue to be caught up in a ridiculous scapegoating and smear campaign that has no basis in reality, and which if pursued through execution, will result in an escalation of economic adversity and lead to yet another Ice-9 event. But that's what politicians do: they scapegoat. And when one crawls to the very top of the blame-game pyramid, and hits the biggest problem of all - US debt, it will be precisely the same. As Jonathan Weil puts it in his latest brilliant missive: "Someday, should the rest of the world ever begin to question the U.S. government’s creditworthiness, don’t be surprised if the geniuses running our financial system find a way to blame short sellers and speculators for that, too."
One lesson government officials and CEOs alike should have
learned is that they only undermine market confidence when they
try to deflect attention from their own organizations’ failings
by making preposterous claims or blaming trumped-up bogeymen.
That some of them keep reaching for the same tired playbook
speaks to their capacity for deluding themselves into thinking
that others will believe them when they say ridiculous things.
As Weil so well observes: "This [scapegoating] has a certain mid-2008 ring to it. Back then, in
the months between the U.S. rescues of Bear Stearns Cos. and the
government-backed mortgage financiers Fannie Mae and Freddie
Mac, the talk from Wall Street kingpins and regulators was much
the same." Are we headed for another systemic failure, only this time with the US already tapped out, our only hope will be for Mars to come and bail out the entire earth. The alternative: global debt repudiation as every country defaults and devalues its currency at the same time. What happens next, nobody knows.
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Something will give soon and the unintended consequences will appear as the largest tsunami ever.
The unraveling will be violent and most of us may only have a nanosecond to run for the exits.
Bitter reminder when the Yen cary trade reversed course many years ago.
The only thing that will kill this market is hope, or lack of it.
Instead of banning CDS, they need to:
1) Drop the stupid name Credit Default Swap and re-name these contracts to what they have always been: options!
2) Create several standardized generic versions
3) Move trading from OTC to regulated exchanges
3) Enforce margin requirements
End of the story!
This common sense approach will make everyone happy and will bring transparency to the market.
They are not trying to make everyone happy and they most certainly are not trying to bring transparency to the market. The sooner everyone comes to this realization, the quicker everyone can get back to work actually solving the problems.
As long as we, you and I and the public, continue to desperately cling to the notion that "they" are actually trying to fix things (which flies in the face of overwhelming evidence to the contrary) we are hostage to the rigged system, holding guns to our own heads as we threaten to blow the hostage away if we try to do anything other than play "follow the leader" into the abyss.
Why is it so hard to come to grips with the fact that "they" aren't trying to fix anything, that the game is extend and pretend? Why do we cling to any "official" action that might appear (when seen from the moon) it could possibly be interpreted as "fixing" things, will grinding our teeth every time it's an inescapable conclusion that they're moving backwards? Are we just little children, submissive to and at the mercy of an overbearing and abusive parent?
We are so traumatized, so conflicted by our own greed, apathy and fear, that we beg our parental oppressor in a barely audible voice "Please Daddy, tell me another lie so that I can pretend it's the truth".
Wow. Very nicely put. Thanks.
Its not only that they either don't know how to fix it, or they know only that they can delay the inevitable. Very sad.
Expand the mind. Maybe they want the system to crash after they've raped the landscape in order to consolidate their power. Do you think the puppets presented for daily display on your boob tube are actually running things?
It's so much more comforting to think them either stupid, misguided or inept. God forbid we accept that they might actually be malicious. Then we might need to do something about it. You feel better thinking them clowns? Then that's what is presented, 24/7/365.
"Why is it so hard to come to grips with the fact that "they" aren't trying to fix anything"
It isn't.
Occam's razor tells me that "they" are comprised of two eternal parts.
one part "hubristic, pathological, greedheaded, amoralist (i.e. Investment Banker)"...the other part "preening, self-important, narcissistic, incompetent (Political figure).
One part of "they" can't help going too far.
The other can't fix the first's excesses because they are stupid, telegenic, uninformed narcissists, capable ONLY of coverup attempts NOT solutions.
For solutions you need a battered, angry, wised up citizenry.
"As long as we, you and I and the public, continue to desperately cling to the notion that "they" are actually trying to fix things (which flies in the face of overwhelming evidence to the contrary) we are hostage to the rigged system."
Totally.
Can they make it past November?
It seems quite obvious that they plan to dump the consequences on the next administration.
...
...
+1 You mean that the combination of infinate leverage, naked unregulated contracts, and computers capable of calculation speeds in the teraflops should be regulated in some way? Sounds Crazy enough to work.
So even as ECB is preparing to launch its own rating agency...
NEW YORK — Connecticut's attorney general sued Moody's Investors Service and Standard & Poor's over ratings the agencies issued on risky investments.
In the civil lawsuit filed Wednesday, Attorney General Richard Blumenthal alleged Moody's and S&P knowingly assigned false ratings to complex investments that pushed the country into recession.
http://www.huffingtonpost.com/2010/03/10/richard-blumenthal-connec_n_493...
Posturing to avoid blame ... see more
http://www.washingtonpost.com/wp-dyn/content/article/2010/03/09/AR2010030903767.html?hpid=sec-business
I can see the headlines now...
Sovereign Defaults in Europe Cause Dow/S&P to Surge to New All Time Highs
Not gonna happen. As I'm sure you realize, this market is about to blow off as it is.
Or
"exploding nuclear ordinances drive market higher on reconstruction"
or how about
"Nuclear winter seen as bullish as commodities rise"
Apple Computer launches new iGasMask with built in Geiger counter. Stock rallies 40 points to 880/share. Analysts see 1500 if fallout intensifies.
Very funny, but it would not surprise me.
how about
nuclear winter put bears into long term hibernation mode..
The FDIC had to close Centenial bank due to lack of a buyer.
Still no bell ringing ?
WaPo is trying to prove a headfake to divert the attention.
Its time for the meltdown in the US.
Wake up sheople !
As always thanks for the information and as usual these details will be ignored until its too late.
This is a derivatives collapse (www.derivativescollapse.com). While some CDS may have legitimate purpose, many are used for speculation (which in itself may not be a big issue). The biggest issue is that the only reason the CDS can be paid off is that the US govt. is backing them, at least in the case of AIG CDS on mortgage debt. CDS, along with most derivatives are used to get around existing regulation, reserve limits, leverage limits, etc. If Greece defaults will the CDS issuers be able to cover the CDS? If not will the EC or the US Treasury (or Fed) be expected to come in and cover them? Maybe CDS were not the cause of the crisis, but there unwinding either in advance of the collapse (as is being postured now) or after the collapse (if no ban is put in place) will probably lead to the next Lehman like event.
It takes two to tango. The fact that some smug, insurance selling son of a bitch believes that his excel model is perfected and therefore anyone 'dumb' enough to buy a CDS on Greek or German or American debt is just a sucker to be milked for the 10k or whatever is reason enough to say bring it the fuck on. Let the bankruptcy judge sort it out.
In theory it takes two to tango, but in reality, Uncle Sam is joining in with our money, so it is really more like 150 million [working taxpayers] doing the tango (but only one really enjoying it).
Well, so much for a rebound in consumer confidence... It will be interesting to see if these issues are shrugged off.
Asian markets are doing litle overnight if that provides any clues. Shrug away.
wow the centenial story (of how it was closed) is scary..
It's kind of eeiry.
It's like everyone is waiting for the collapse and denying it will happen at the same time.
I'm waiting ... but it's not going to happen
In the Land of the Law of Unintended Consequences, banning CDS trading will mean increasing interest rates on sovereign debt. After all, if you can't buy protection, you want to be rewarded for your risk via extra yield.
I wonder if Greece (et al) are ready for exploding rates and more failed auctions?
If you wanna hang out youve got to take her out; cocaine.
If you wanna get down, down on the ground; cocaine.
She don't lie, she don't lie, she don't lie; cocaine.
When your day is done and you wanna run; cocaine.
If you got bad news, you wanna kick them blues; cocaine.
She don't lie, she don't lie, she don't lie; cocaine.
Ban the hedge. No reason to be long crap anymore. Dump crap. Explain that to the lawyers.
The simple regulatory middle-ground solution is to ban NAKED CDS positions. i.e. you must own the bonds if you want to buy CDS protection. It should have worked this way from day one.
This will not cause a run from the European bond market.
You can't buy insurance on a house you do not own. One damn good reason is that if people could - cases of arson would climb dramatically.
life is too funny. if CDS's were invented today, we'd say ban 'em ouright, prevent them from ever being traded. But now that the cat is out of the bag , banning them would cause chaos.
still, no-one in power has the wisdom or will to regulate them properly, so we have to sit and watch until they cause their daisychain clusterfuck. everyone's ankles are chaind together , sliding into the abyss
cute thing is, zero hedge often rails against what a bogus instrument they are, but when europe threatens to ban 'em, ZH comes out swinging in their defence.
In the event this was to go ahead, and bond interest rates were to spike as a result, wouldn't the short-to-medium term result be a massive liquidity crunch, resulting in deflation?
There has been NO forcefull regulatory measures since the start of this crisis - the solution seems to feed the monster with more debt money while production keeps crashing from the weight of all this paper - I say lets see what happens when you ban this counterfeit money outright , the system seems to be failing anyway so lets see what happens people - there is nothing to lose now.
Who wrote this dumb ass thing? Tyler? What evidence do you have that the vast majority of CDS's are not naked, i.e. legitimate hedges / insurance? I think not. I think that most of the writers of this crap know they can't cover it. Just take the money and run to Uruguay when the bomb goes off.
CDS are criminal. They encourage the mafia banksters to takedown bounties which can be nations. Whoever defends CDS works/is the mafia, even ZH.
As one who is always trying to figure out how much sealing wax and toothpicks are holding this rotting foundation together, I am always puzzled by the view that risk can actually be eliminated. If AIG taught us anything, it is that risk gets shuffled around until it eventually lands in the lap of the one least able to afford it...and then it gets tossed on to the taxpayer.
In the case of sovereign CDS', somebody (CDS writer) is now holding that risk which the bond buyer tried to insure against.
If the outlawing of sovereign CDS' actually comes to pass, then the only change is that the risk may be transfered back to someone who is slightly more risk averse than the CDS writer. How many basis points does this risk aversion entail? The process of redistribution is the scary thing, but when all is said and done, the cost as measured in the increased rate of interest is may not be much.
If hedges are outlawed,
only outlaws will have hedges.
I think the whole derivatives market is like a black hole: stuff goes in but it never comes out. I think that those who created it, having begun to figure out that they can never toss in enough money to "fill" it, have decided to let it collapse in on itself. Having made that decision, and needing a scapegoat to blame, they have incited their bought and paid for puppets (politicians) into banning it. Once done that quadrillion dollar plus black hole will collapse in on itself, the money dumped into it to never be seen again (except you can be sure that the "taxpayers" will somehow end up on tap to make whole the criminals who caused the mess).
Greece on strick has some real results. Hmm.... What about American sheeple, oh, they are busy watching Americal Idol and eating McDonalds.
How about a change Americans, are you ready to actually take some action for a a REAL change?
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