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What Do Rising Sovereign Credit Default Swaps Mean?
- Ben Bernanke
- Ben Bernanke
- Bond
- CDS
- Central Banks
- China
- Credit Default Swaps
- David Rosenberg
- default
- Dubai
- Equity Markets
- Eurozone
- Federal Deposit Insurance Corporation
- Foreclosures
- Global Economy
- Greece
- Gross Domestic Product
- Housing Inventory
- India
- International Monetary Fund
- Ireland
- Italy
- Larry Summers
- Lehman
- Markit
- Meltdown
- Merrill
- Merrill Lynch
- Mexico
- Niall Ferguson
- Portugal
- Reality
- Rosenberg
- Simon Johnson
- Sovereign Debt
- Sovereign Default
- Sovereign Risk
- Sovereign Risk
- Sovereigns
- Tim Geithner
- Volatility
- Wall Street Journal
Here are the CDS of Greece, Portugal, Spain and the U.S.:
[click here for full image]
Rolfe Winkler argues
that - in the short-run - the PIIGS countries (Portugal, Ireland,
Italy, Greece and Spain) will slash their budgets and get bailed out by
the EU.
Simon Johnson thinks
that the weakening Euro caused by the PIIGS' woes will hurt American
exports (weaker Euro equals stronger dollar), and could lead to
problems for leading global banks.
Other commentators fear that the PIIGS' crisis has as much potential as a financial "contagion" as the subprime meltdown and the failure of Lehman.
But
for the long-term view, we need a little more perspective. One of the
world's leading economic historians - Harvard professor Niall Ferguson
- says:
The
economists are ill qualified to analyse the current economic situation
since they lack the overview of historians such as himself.
"There are economic professors in American universities who think they
are masters of the universe, but they don't have any historical
knowledge. I have never believed that markets are self correcting. No
historian could."
Ferguson warns of huge government debts threatening the solvency of entire nations:
"The
idea that countries don't go bust is a joke... The debt trap may be
about to spring ... for countries that have created large stimulus
packages in order to stimulate their economies."
But
whether or not large nations actually go bankrupt, one thing is clear .
. . Larry Summers, Ben Bernanke, Tim Geithner and their foreign
counterparts have failed.
As I noted in December 2008:
BIS
[the Bank of International Settlements - the "Central Banks' Central
Bank] points out in a new report that the bank rescue packages have
transferred significant risks onto government balance sheets, which is
reflected in the corresponding widening of sovereign credit default
swaps:The scope and magnitude of the bank rescue
packages also meant that significant risks had been transferred onto
government balance sheets. This was particularly apparent in the market
for CDS referencing sovereigns involved either in large individual bank
rescues or in broad-based support packages for the financial sector,
including the United States. While such CDS were thinly traded prior to
the announced rescue packages, spreads widened suddenly on increased
demand for credit protection, while corresponding financial sector
spreads tightened.In other words, by assuming huge
portions of the risk from banks trading in toxic derivatives, and by
spending trillions that they don't have, central banks have put their
countries at risk from default.
Nothing has changed. As former chief Merrill Lynch economist David Rosenberg writes this week:
First
the governments bail out the banks who were (are) basically insolvent.
Then these governments, especially in Europe, see their balance sheets
explode and face escalating concerns over sovereign default. The IMF
now predicts that the government debt-to-GDP ratio in the G20 nations
will explode to 118% by 2014 from pre-crisis levels of around 80%.
Now,
the ball is put back onto the banks because many have exposure to the
areas of Europe that are facing substantial fiscal problems right now.
According to the Wall Street Journal, U.K. banks have $193 billion of
exposure to Ireland. German banks have the same amount of exposure and
an additional $240 billion to Spain. Many international bond mutual
funds also have sizeable exposure to sovereign debt of Portugal,
Ireland, Greece and Spain as well. Contagion risks are back. Stay
defensive and expect to see heightened volatility.
In a nutshell,
toxic assets have basically been swept under the rug in the hopes that
we will outgrow the problem. Leverage ratios across every level of
society are still reaching unprecedented levels as the public sector
sacrifices the sanctity of its balance sheet in its quest to stabilize
the dubious financial position of the household and banking sectors in
many parts of the world.
Whatever bad assets have been resolved
have almost entirely been placed on the books of governments and
central banks, which now have their own particular set of risks, as we
have witnessed very recently in places like Dubai, Mexico, and Greece,
not to mention at the state and local government level in the United
States. We simply have not seen a reduction in the percentage of
properties with mortgages that are “under water”, hence the FDIC has
identified 7% of banking sector assets ($850 billion) that are in
“trouble”, so how can it possibly be that the financial system is
anywhere close to some stable equilibrium?
When accurately
measured, including the shadow inventory from bank foreclosures, there
is still nearly two year’s worth of unsold housing inventory in the
United States, and commercial vacancy rates are poised to reach
unprecedented highs, and this excess supply is bound to unleash another
round of price deflation and debt defaults this year. The balance
sheets of governments are rapidly in decline across a broad continuum,
and it is particularly questionable as to whether Europe is in sound
enough financial shape to weather another banking-related storm.
The
global economy is set to cool off. Not only is China and India warding
off inflation with credit tightening measures but most of the fiscal
and monetary stimulus thrust in the U.S.A. and Canada is behind us as
well. And, the fiscal tourniquet is about to be applied in many parts
of Europe, especially the PIIGS (referring to Portugal, Ireland, Italy,
Greece and Spain — these countries account for a nontrivial 37% of
Eurozone GDP). Greece’s GDP has already contracted by 3.0% YoY, as of
Q4, and is expected to contract 1.1% in 2010 and 0.3% in 2011 as a 13%
deficit-to-GDP ratio is sliced from 13% to 3% (assuming this fiscal
goal can be achieved politically). Portugal has a 9.2% deficit-to-GDP
ratio that is in need of repair and Spain has a deficit ratio that is
even worse, at 11.4% of GDP.
The bottom line is that even if the
fiscally-challenged countries of Europe do not end up defaulting, or
leaving the Union, the reality is that they will have to take draconian
measures to meet their financial obligations. Devaluation was the
answer in the past in Greece but it cannot rely on that quick fix this
time around without leaving EMU and if it did, then that could make it
even harder to service its Euro-denominated debts — at least not
without a restructuring. And, if Greece did attempt at a debt
restructuring, rest assured that Italy, Spain, Portugal and Ireland
would be next — we are talking about a combined $2 trillion of
potential sovereign debt restructuring that would more than triple the
$600 billion direct cost of the Lehman bankruptcy.
This poses a
hurdle over global growth prospects at a time when Asia will feel the
pinch from the credit-tightening moves in China and India. And
heightened risk premia will also exert a dampening global dynamic of
their own in terms of economic decision-making by businesses and
households alike. The intense sovereign risk concerns are not limited
to Europe either. In the U.S.A. we saw CDS spreads widen out to their
highest levels since the equity markets were coming off their lows last
April. According to the FT, the Markit iTrax SivX [sic] index of CDS on
15 western European sovereign credits rose above 100bps on Friday for
the first time ever.
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http://www.levy.org/pubs/wp74.pdf
The Financial Instability Hypothesis by H.P. Minsky spoke of the final stage"Ponzi Financing". Minsky did not have to contend with Interest Rate and Credit Default swaps in his hypothesis which puts a wild fire accelerant on the hyper deflating Global Sovereign Ponzi financing scam . The "Jig " is up in every sense of the word; the equity & cash flow is simultaneously GONE.
http://www.takeitbackday.org/
Talking of peddling fear Goldman, Blackrock et al are NOT peddling fear. They want to keep the game going just a while longer but institutional (read pension funds) and individual investors (read sheeple) have become risk averse for a change.
In other (good) news Washington DC was shut down due to the snow and Congress took the day off-mercifully for America.
The problem with sovereign debt is not that it can default, just that it's rarely been seen to actually do so.
Certainly internal debts won't default. But so much debt is held around the world, it's no longer an issue of debt in a particular country or in a particular currency.
And unfortunately, when hard times hit countries, there is a natural move toward "improved" controls. Which is really just fascism. So the likelyhood of this is, sadly, very high unless we "gird our loins" and be wary.
It doesn't have to happen that way.
IF our leaders were honest, they would allow for some default, some deflation, and let the markets take their course. Niall Ferguson is wrong about markets being self-correcting. Of course they are. But unfortunately no markets are pure markets....so the reason they don't self correct has less to do with whether they are markets and more with how much government intervention is engaged.
We have an investor class that firmly believes it is the government's role to protect large profits. As a result, they EXPECT the government to step in when things start "going wrong" (really just markets correcting). This only exacerbates things and markets become even more imperfect than they were before. The self-correction becomes a directed (often in flawed manner) process, leading to ever more problems and fewer solutions.
The ONLY solution is to let failures fail without protections. It has to be so.
We're not doomed. Things typically go back to normal after a period of chaos. It's just a new kind of normal.
Tell that to Argentina.
Zimbabwe defaulted via hyperinflating against foreign debt, and it was brutal jubilee, but now they are a govt and a people without debt and getting on with their lives...
Happy like happy, combing rivers for gold powder to exchange for a loaf of bread.
Ah gold... What a wonderful thing. Such a hedge that even Zimbabwe is thriving on it.
Hard to say that Goldman is screwing Greece when Greece is behaving like a teenager in the last throes of drug addiction.
In case none of you have noticed, we are no longer on the gold standard, nor is our currency pegged to a fixed exchange rate. Household and corporate debt is not the same as sovereign debt, and there is no reason any country will default on debts issued in it's own currency. It is absolutely astounding how few pundits understand modern monetary systems. If anyone would like to educate themselves on this issue please spend some time reading Bill Mitchell's excellent blog.
Historians will also remind us that after failed democracies comes fascisim. People laughed in Europe in the early 1930's to this possibility and were shocked when it happened and death camps sprung up across central and eastern Europe. Denial is not the proverbial river in Egypt!
Rising social security and medicare obligations + hopelessly large debt obligations=
nitro & glycerin
Chaos ahead buy precious metals. Only solution is to print more money to service and pay off all these debts.
The other solution is to modify the contracts for a longer term when people and countries can afford to pay off the debts. Iceland is trying to negotiate their banking problems with The Netherlands and The UK. We can pay when we can pay. Sometimes more, sometimes less.
An inelegant solution. But a solution none the less. The problem lies in the "inviolable contract". Yet, companies violate the contract daily.
Inflation not a solution at all
as it only makes things more
expensive and worse for all,
leading to anarchy, chaos,
starvation and dictatorship.
The other more practical solution
is default...
http://www.jubileeprosperity.com/
losing strategy in the short-run (~ next 6-12 months)- dollar rally will continue as shit hits fan and deflation roars back
It means that Goldman Sachs is going to screw Greece in the same way that it screwed AIG.
http://www.huffingtonpost.com/david-fiderer/the-times-story-on-goldma_b_...
The Squid is like a cat burglar. Never seen or suspected until all your shit be gone.
Descending asset values anchored to enormous debt.
Nitro and glycerine.
All it needs now is a little shake.
It means some big global macro hedge funds and investment banks are going to make a killing peddling fear while they set-up the opposite side of the trade. Of course, they'll also charge their clients 2&20 for this "alpha".
In Greek we say MALAKIES!!!
Leo is like the Kevin Bacon character in Animal House, crying out "All is well" while being stampeded. Question for you, Leo. Do you really think being the first post on every ZH article explaining, in great detail, not just arm-waving, the unholy mess the world is in, and then screetching, "Wrong, wrong" is going to sway anyone?
Do you think anyone is going to slap their forehead and say, " Damn, Leo is right, what was I thinking? I'm going to run out and get me some Chinese solar stocks!!"
Ah, well, knock yourself out.