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Guest Post: Just Default Already, Greece

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Sat, 04/03/2010 - 13:29 | Link to Comment Lionhead
Lionhead's picture

"So... does the CDS curve overreact, or is the bond market just slower to process credit risk information?" Two different markets with two different sets of players with differing agendas perhaps. I vote for the bond market with its larger set of participants vs. the smaller, opaque CDS market where some participants might be making exaggerated bets on non-default.

Sun, 04/04/2010 - 07:52 | Link to Comment jm
jm's picture

CDS is more liquid, which would contribute to its volatility.

I'm not sure to what extent Greek bonds are dominated by marginal agent buying/selling.

There may have been rising political risk involved in the CDS action.   

Sun, 04/04/2010 - 11:31 | Link to Comment Lionhead
Lionhead's picture

"There may have been rising political risk involved in the CDS action." For sure & likely less in the bonds. Rates are poised to go higher for the retest:

http://i40.tinypic.com/1196mj4.jpg

 

Sat, 04/03/2010 - 13:35 | Link to Comment j-dub
j-dub's picture

Because the Greece issue has become so multi-layered and convoluted as article after article, headline after headline has overloaded the senses with new twists and turns, I have meticulously established a chronologically correct timeline of events and/or headlines. This WILL FINALLY clear up any and all confusion.
(Please, DO NOT send thank you's to my SA inbox.)

Greece has announced that it's deficits are overwhelming.
The European Union will offer Greece assistance.
Greece is in talks with the European Union concerning it's deficits.
Greece's deficits can be overcome without assistance.
Germany has agreed to support Greece.
Greece has yet to discuss assistance from Germany, EU leaders say.
The EU will not bail out Greece.
EU leaders will meet to discuss the Greece situation.
"Greece is on their own," EU leaders say.
Greece's top brass say Greece will go bankrupt without EU assistance.
The EU says it is behind Greece 110% percent.
Greece does not need EU support, reports say.
The IMF has been approached concerning Greek debts.
No IMF assistance will take place.
The IMF is discussing a bailout for Greece.
Greece's austerity plan will prove effective in solving all the present problems.
Greece's debt load can not be overcome by self imposed spending cuts.
Greece is not insolvent, according to it's prime minister.
Greece will go bankrupt this year, if aide is not immediate.
The EU will bailout Greece.
Unequivocally, no EU money will be spent on a Greek bailout, EU insiders reveal.
The IMF has advised Greece to restructure it's debt.
The EU will not bailout Greece.
Greek bailout imminent, insiders say.
CDS trades are the cause of Greece's problems.
Years of rampant government spending has crippled Greece.
Greece will go it alone.
Top economists say Greek default is inevitable.
IMF will back Greece.
It appears the EU and Greece are heading towards an agreement.
Germany will not give Greece one Euro.
Act IV of Greece situation is now in full swing.
Act III of Greece situation is right around the corner.
Act II of Greece situation has yet to rear its ugly head.
Traders are hopeful that EU and Greece can work together to save the EU.
Experts agree that an EU bail out of Greece will ultimately destroy the Euro and severely weaken the European union.
Financial summit is the last chance to backstop Greece.
Greek finance ministers say Greece is not bankrupt.
The IMF must help Greece in order to avoid Greece defaulting.
Greece implores EU to offer backstop package.
EU will meet to discuss backstop package.
Greece threatens EU if financial aide is not offered, and soon.
Greece was not a subject during latest EU meeting.
Ultimately EU bail out of Greece is not possible, insiders disclose.
It is announced that Greece has full support of the European Union..
Portugal is the next Greece.
Italy is the next Greece.
The U.S., is in many ways worse off than Italy.
Japan is the next Greece.
The U.S. and Japanese situation are all too eerily all too similar.
The dollar as the reserve currency protects the U.S.
The U.S. dollar is doomed.
The situation in the U.K. is much, much worse than that of the U.S.
Spain is next to threaten defaulting.

Got that?
:)

Sat, 04/03/2010 - 14:06 | Link to Comment Dirtt
Dirtt's picture

Spitting coffee funny.

 

"Act IV of Greece situation is now in full swing.
Act III of Greece situation is right around the corner.
Act II of Greece situation has yet to rear its ugly head."

So we are in Act I is your point.

"Portugal is the next Greece.
Italy is the next Greece.
The U.S., is in many ways worse off than Italy."

Backhoe and cement truck on the way....build b*omb shelter. And hide your gold.  The NY Fed is coming.

Sat, 04/03/2010 - 14:16 | Link to Comment Segestan
Segestan's picture

Kind of like fans , no one knows who will win or the final score .. but it will end.. it's a game.

Sat, 04/03/2010 - 13:54 | Link to Comment three chord sloth
Sat, 04/03/2010 - 14:33 | Link to Comment deadparrot
deadparrot's picture

Greece needs to get real. Sure, you will be the butt of some jokes for a while, and sure it hurts to swallow your pride and ask for a handout. But think about the endgame. You default first and you are first in line for assistance. You will get far more funding and easy loans than the next country to default. I have a feeling the worst pain is going to be felt by Portugal or Italy or whoever is the 3rd country to default. By that time, IMF funds will be depleted and there will be zero political will to lend a helping hand.

Isn't that exactly what we are experiencing in the US on the housing front. The early defaulters keep getting handouts. Pity the poor fool who scrimps and saves to keep making his mortgage payment. He's the real sucker. Honor and honesty have truly become liabilities.

Sat, 04/03/2010 - 14:44 | Link to Comment jm
jm's picture

Damn straight on so many levels.

Distressed debtors and creditors need to get real and accept that no one is coming out of this 100% whole. 

There needs to be debt restructuring for those that at least attempt to keep their word and bond, not for those who give up and pay nothing.

Sat, 04/03/2010 - 15:32 | Link to Comment carbonmutant
carbonmutant's picture

I don't think Greece is worried about its pride. It's worried about how much austerity the Unions will tolerate.

Sat, 04/03/2010 - 15:29 | Link to Comment ZeroPower
ZeroPower's picture

Id like to point out an inverted yield curve (no matter whether USTs or CDS) isn't always a bad thing

Sat, 04/03/2010 - 18:32 | Link to Comment jm
jm's picture

Please explain.

Sat, 04/03/2010 - 20:11 | Link to Comment ZeroPower
ZeroPower's picture

Typically we'd expect inverted yield curves to predict a recession, as there is more uncertainty in the shorter time horizon than in the longer one, hence a reason for shorter term treasuries to be paying more than longer term ones. But on a macro level, one would say that the short term funds went up because of Fed fund raises. The reason for those raises is another issue. Now how about flipping the typical "they raised rates to slow down the economy" talk we are going to see in the near future to project instead "they raised rates to stop injecting money".

So, in my view, the Fed will start rapidly increasing the Federal Funds rate (maybe as fast as it was decreasing it?) to do 2 things:

1- slowly remove the excess stimulus pumped into the US economy in 2008/2009. removing money does remove stimulus simply through the money multiplier effect and there is likely an expectational impact as well;
2- to anticipate and prevent any potential actual and inflation 'expectations' from entering both the macro economy and the expectation sets of forward looking financial market participants.

Getting back to the main point at hand, while probably somewhere in the ballpark of 3/4 past recessions the yield curve was a correct leading indicator, these effects are mostly found in the longer-term time horizon. Shorter term, a flat or inverted curve only has an immediate effect on certain businesses. Eg: Banks fall into yield compression, where they see profits squeezed because they have to pay more to attract short-term money in the form of CDs and other investor deposits in order to make long-term loans. 

If you read this article: http://www.businessweek.com/magazine/content/06_03/b3967082.htm the author argues the inverted curve we saw at end of 2005 into 2006 was probably NOT a signal of a recession. Of course we saw how that turned out, but the point is that it doesn't always signal such an event.

Sat, 04/03/2010 - 20:33 | Link to Comment jm
jm's picture

Very good info, especially that inversion implies great near term uncertainty.  I agree on the subject of the yield curve, because the risks embedded in it are diverse.

I also believe that an economy can get used to an inverted yield curve and it doesn't mean sure recession.  This happened in the post-civil war era when QE was stopped and economic policy normalized.  If you accept the reconstructed yield curve data.

With CDS, the curve purely reflects perceived credit risk.  This makes it a bit different in that near term default risk > late tenor default risk is very perverse...or maybe I haven't thought it through well enough.  Seems to go against the "on a long enough timeline, the survival rate for every <cashflow> drops to zero."

CDS seemed more noisy than bonds (reacting to every rumor?).  Thus its information content is more uncertain even though it is focused on a single risk factor. 

Sat, 04/03/2010 - 17:10 | Link to Comment truont
truont's picture

Greece solvency will take every long, last, raspy breath before it actually dies.

Sun, 04/04/2010 - 10:51 | Link to Comment Jay for Pay
Jay for Pay's picture

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So the fundamental question is how can they mess it up more than what it is right now? Well let’s see for starters they can try to issue Euro 5 - 10 billion worth in US Dollar denominated bonds. After all they are expert in establishing proper controls. So if the US Dollar was to get stronger and oops I did again scenario happens, they only had to ask the Christodoulou of the day in what currency should they be considering issuing the next global bond to refinance or service their future interest rate debt? Maybe issuing a Sovereign bond in Chinese Yuan? Why not the Chinese seem inclined not to revalue their currency forever and 10 year rates are not too bad…… :)

But que sera, sera............Meanwhile back in virtual reality land we see CDS spreads >300 bps, I may be a little bit optimistic on the Greek capacity to finding solutions but I think if you can BS the Germans and other EU members that you are properly reporting everything and that you are running a fiscally responsible budget why not the world? Surely these CDS will be trading at +/- 220 bps within 6 months. After all Chaos is a Greek word.  

 

Sun, 04/04/2010 - 13:31 | Link to Comment Jay for Pay
Jay for Pay's picture

So the fundamental question is how can they mess it up more than what it is right now? Well let’s see for starters they can try to issue Euro 5 - 10 billion worth in US Dollar denominated bonds. After all they are expert in establishing proper controls. So if the US Dollar was to get stronger and oops I did again scenario happens, they only had to ask the Christodoulou of the day in what currency should they be considering issuing the next global bond to refinance or service their future interest rate debt? Maybe issuing a Sovereign bond in Chinese Yuan? Why not the Chinese seem inclined not to revalue their currency forever and 10 year rates are not too bad…… :)

But que sera, sera............Meanwhile back in virtual reality land we see CDS spreads >300 bps, I may be a little bit optimistic on the Greek capacity to finding solutions but I think if you can BS the Germans and other EU members that you are properly reporting everything and that you are running a fiscally responsible budget why not the world? Surely these CDS will be trading at +/- 220 bps within 6 months. After all Chaos is a Greek word.  

Sun, 04/04/2010 - 19:30 | Link to Comment excellent
excellent's picture
Just Default Already, USA
Sun, 04/04/2010 - 19:53 | Link to Comment caconhma
caconhma's picture

Instead of nationalizing, purging, prosecuting the guilty parties, and privatizing back insolvent WallStreet banks responsible for the present crisis, the US ruling elite and oligarchy has done everything possible to save, protect and enhance their criminal interest & activities at expense of the overwhelming majority of American people in general. As the result of these actions, the US society became more polarized, the crisis was not either addressed or solved, and the ruling elite and oligarchy have lost any legitimacy they had before.

Consequently, the crisis was exacerbated. At the same time, the society became much more corrupt, polarized, and much less manageable due to deliberately fraudulent accounting & managing & propaganda processes.

Sat, 04/10/2010 - 05:44 | Link to Comment mark456
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