This page has been archived and commenting is disabled.
Guest Post: Do We Really Know Greece's Default Will Be Orderly?
Submitted by Charles Hugh Smith from Of Two Minds
Do We Really Know Greece's Default Will Be Orderly?
The market seems to be pricing in an orderly Greek default or a successful "firewall" around the potential instability. Are the unknowns really all known?
The equities market is acting like we know Greece's default will be orderly and no threat to financial stability. It is also acting like we know the U.S. economy can grow smartly while Europe contracts in recession. Lastly, the high level of confidence exuded by market participants suggests we know central bank liquidity is endlessly supportive of equities.
What do we really know about the coming default of Greece? Whether we openly call it default or play semantic games with "voluntary haircuts," we know bondholders will absorb tremendous losses that are equivalent to default. We also suspect some bondholders will refuse to play nice and accept their voluntary haircuts. Beyond that, how much do we know about how this unprecedented situation will play out?
It may be a good time to unearth a famous statement about known knowns and unknown unknowns:
Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know. (Donald Rumsfeld)
What we know is that the European Union is a model without easy historical precedent. Any predictions made about Greek default or the many financial and political machinations designed to "firewall" Greek default from the rest of the EU are speculations, as there are no good historical precedents to guide our guesswork. To say we "know the European Central Bank has this under control" is to claim knowledge of the unknowable.
We also know the derivatives market for credit default swaps (CDS) is not transparent, so no one can claim to know the risk levels in this market or the possible spillover effects should an "event" trigger instability.
Here is how frequent contributor Harun I. views the CDS market and Greece's impending default:
My contention regarding Greece has been that they cannot be allowed to default because of a tremendously leverage system. This contention remains unchanged.
Below, the excerpt from KWN, indicates the problems confronting the system. Ten years ago Greece defaulting would not have been noticed but today, in a world where the CDS market has gone from $60 billion to over $600 trillion in a decade, and needs another $100 trillion in new debt over the next decade, Greece is a line drawn in the sand, apparently even if they burn it to the ground.
Note the discussion of hypothecation. He is saying that customer accounts have been used two to three times to serve as collateral. And should their money disappear as it will when things fly apart, it will have been perfectly legal because all of this paper was rated AAA when it was purchased. (This is why you will not see any widespread compliance audits even in the wake of MF Global). At leverage of 500 to 1 all equity is wiped out after a 0.2 percent decline or default.
Here is the link Harun referenced: This is Financial Armaggedon, Lehman X 1,000
One thing that isn’t talked about much, although I did receive a note today from UBS regarding it, is derivates related to bond insurance...
There are basically three times the amount of bonds out there, existing in contracts, to insure those bonds. Now you have to remember that a lot of these contracts were signed when all of these bonds were considered AAA rated. People didn’t believe they would default.
So their is huge exposure in these dangerous contracts. There was one contract I saw that was going to pay 500 to 1 for the loss. These things are incredibly toxic contracts confronting the system right now. We don’t know who the counterparties are, and in many cases it’s hypothecated two or three times and it’s something that’s worldwide.
We are looking at financial Armageddon. This is just awful, Lehman times 1,000. This is why they are going to all of these crazy extremes and calisthenics to make it seem like Greece is not defaulting so the bond insurance doesn’t kick in.
I have no idea if this is true or not, but the point is neither does anyone else. The possibility that one bondholder refusing to accept the "haircut" demanded by the Eurocrat lackeys of the banking cartel might trigger a contractually valid demand for a CDS to be paid does not seem priced into the equities market.
Under a slightly more lurid headline is another story making the same point: Forget Greece, Traders Are Worried About Something That Could Send Us Back To The Middle Ages.
As of now, most of the public discussion has centered on potential contagion among the banks as most of the Greek sovereign debit is held by the European banking community.
Traders, however, fear that the real risk is in the area of credit default swaps (CDS). They are insurance policies, individually written, that basically say - if Greece defaults, we’ll pay you what they should have.
Credit default swaps have grown exponentially over the last decade. Since they are individually written, there is no clear visible record of how many CDS contracts are outstanding. Also unknown is who is involved. The two parties obviously know who the counter-party is but there is no public record that would allow a regulator or a third party to find out who was involved.
No one knows how much CDS exposure there is on Greek debt but is assumed to be a lot. Banks and others looked at the very high and attractive yields on Greek bonds and began salivating. But, what about that risk - better buy some insurance.
If the CDS written against Greek debt are not allowed to execute, then that calls into question all CDS insurance written against Euro-based debt. After all, if the banking cartel and its Eurocrat lackeys can essentially negate CDS written against Greek debt, why wouldn't they do the same with CDS written against Portuguese, Irish, Spanish or Italian debt? And if they pull that off, why would anyone trust any CDS written against debt anywhere in the global system?
I have no idea what will happen in the next few months, but I think it is fair to say that what may be unleashed is a known unknown. To be supremely confident that a Greek default will be orderly is to claim knowledge of that which cannot be known.
That smacks of hubris.
As for the American economy expanding smartly while the rest of the global economy contracts--is there any precedent for this premise? Since there is no precendent for the financial crisis enveloping Europe (and it can be argued, China), then whether the U.S. can grow while the rest of the world slumps into recession is a known unknown.
What we do know about global central banks flooding the world with liquidity is that this inflates asset bubbles that always pop with devastating consequences. Since this is known, what is the basis for the confidence that global liquidity will drive equities ever higher without negative consequences? Is this a "liquidity driven rally" or a "blow-off top"? Perhaps the difference between the two is purely semantic.
Once again the risk of liquidity-inflated asset bubbles--oops, I mean "rallies"--is a known unknown.
But what about the unknown unknowns? Markets don't seem to be pricing in any of the known unknowns, i.e. the risk of disorderly default, much less the unknown unknowns.
Maybe the U.S. will expand without regard to Europe or China or Japan, and maybe the Eurocrats will successfully "firewall" the Greek collapse. (Never mind the cost to the non-Elite Greek people--what matters is getting all those politically powerful bondholders and hedge funds paid.)
It seems to me that there is ample evidence that the situation very likely holds unknown unknowns--but few seem to have priced that into the equities markets. It often seems like a financial soap opera is playing out on some distant stage, but the money being made and lost is real--if the players cash out of the game before the lights go out.
»
- 11467 reads
- Printer-friendly version
- Send to friend
- advertisements -
Can you walk into a croweded movie theater and yell FIRE?
In America that would be ignored.
Isn't orderly default an oxymoron? If defaults were orderly you wouldn't have creditors fighting like animals over the scraps of your carcass.
Greece please call Iceland and ask them how things are going.
Sure the citizen had to quit pushing paper and start handling those fishing nets again, but the people are eating. The country is functioning.
Argentina also did it. The USSR did it.
The Greeks will just have to get back in the kitchen and go back to running the restaurant, liquor store, dry cleaners...(insert your offensive sterotype here)
I'm not so sure about this being as bad as it is made out to be. If we are pretty sure that there are unknowns that are unknown, then they are known unknowns, that are unknown. That doesn't seem to be near as bad. So If we know that there are unexpected and unknown things that we don't know about all this, then of course, we can plan on it and it will be an orderly default.
This is much better than proceeding blindly forward not knowing what we don't even know.
So, great article. The mere fact that we now know that there are unknown unknowns, will change the whole situation immensely.
I think in this sense the term "orderly" means intimidating the Jackels into eating shit so you can keep the Greek carcass whole. Otherwise we'de be pillaging greek public assets to pay the debt (wouldn't the Parthenon look cool in Disneyland).
Very true! As they fill their fat ass with popcorn, chocolate raisins and a hot dog, while they text and facebook all at the same time!
Dude you sound like you might be a terrorist
better yet, just yell out the ending!!!
Yeah, Athens looks verrrrrrrrrry orderly right about now.
I hear that retail investors are starting to buy into the markets at the high; a perfect time for a disorderly default and a flash crash as the robots are going to be to the exits first if they aren't there already.
It will be a la Merkel, so, the answer is:
YES, it will be orderly in 2013.
Jamie Dimond assured me..., all is well.
Yup. Greek default and the systematic collapse of the Europonzi is priced in. Move along now.
"All is well...all is well..."
http://www.macrobusiness.com.au/wp-content/uploads/2011/09/robot.jpeg
what does anyone "really" know with all the lies and propaganda stuffed down our throats daily by the MSM and PsyOps against it';s citizens?
"subprime is contained"
You know... It's all fucking bullshit...
1. It's DISORDERLY when there is desire to 'consolidate' (Bear Stearns, Lehman, Merrill, Countrywide, etc.)
2. It's ORDERLY when they need more time to print more debt (& buy gold with it)...
Good example. And in reality, without fake money backstopping the mess, subprime would likely have already brought the whole thing down. More debt backstopping debt to keep cascading defaults at bay. It'll work... until it doesn't work and then look the fudge out. Here is what everyone should know... there is no solution. At some point the whole house of cards; debt based money and fractional reserve banking... basically the global monetary system will collapse. Get ready... because it's coming.
BACKSTOP = give JPM & Goldman Sachs free money to buy up any assets of value in the collapse
GAME ENDS = when everything of value has been confiscated, blow up the currency, start a war, & then start the game all over again...
At that point, "they'll" deem sovereign gold counterfeit or at least cast a pall over precious metals based currency.
I just wish I hadn't had that boating accident...
A metaphor and a simile:
A Greek default will be as orderly as the latest peaceful protests in Athens:
http://www.youtube.com/watch?v=dOQNnYiOc4k
Hopefully it won't get any worse than that.
Obligatory. Boondocks version of Known Unknowns - https://www.youtube.com/watch?v=30x8VTCaOws
i have absolutely no sympathy for the bond holders and i do not care if they get wiped out...anyone who loaned to greece was one lightbulb short of a christmas tree....
fuck the banksters
And what about people who loan to Japan and the US?
If you have you're money in a bank then they are obligated to lend that money out on your behalf in order to make you a return. Make no mistake, it is not the banks money that is buying greek debt, it is the money of those who have money saved in that bank. These could be individuals or corporations and they could stand to loose a lot.
Yea I know, I know, it's all FDIC insured. But FDIC only has 60-70 billion. What happens if a cascade of Eurozone defaults costs the banking system a lot more than that? And what about business banks with more deposits than can be covered by FDIC?
The fear of CDS seems overblown.
When it was necessary the Fed printed billions overnight. They can do it again, the difference is in few more keystrokes (few more 000).
Is that positive for gold? Yes. Can they print and cover up? Yes.
Billions, who bothers with billions these days. A major CDS event will be measured in tens of trillions --TRILLIONS -- and even Ben isn't prepared to print that much to bail out holders of European CDSs. Might be fun to watch if he tried.
sunny
WHEN General Hamm takes Athens then we will know who's in charge. THEN we'll see who gets paid what.
If Greece defualts, If Greece defualts, if Greece defaults.....
What the market is saying is there is not going to be a default, the what, the game continues....
Yup they found the experts who will tell them what they want to hear and they are buying into it 100%. This is the problem when you're entire ideology is built upon proof by authority, your view of how the world works is only as good as the disfunctional view of the experts you listen too. And, when people actually trot out facts backed up by research and evidence you point to your expert and say "but he disagrees." Then the expert hands you a line of bullshit that aligns with his politically driven view so you can say your opponent doesn't know what they are talking about, and dillude a mass of other lemmings into heading off the cliff.
If Greece defualts, If Greece defualts, if Greece defaults.....
What the market is saying is there is not going to be a default, the what, the game continues....
How many papers'money cubic meters this time ?...
About the size of the Chicago Fed banknote bag.
Wish I could go back to blissful ignorance, this is depressing shiite.
Define "orderly"
http://www.crossfitnewmarket.co.nz/wp-content/uploads/Funny-Pig.jpg
Greece is SOOO last year. We haven't even begun with the 2 Ton gorillas of Italy/Spain/Portugal/Ireland yet.
Don't need a firewall, you need a floodgate.
50+% haircut or CDS?
50+% haircut or CDS?
That is the question.
Banksta's will choose the latter.
I wonder - does anyone know if CDS contracts have a force majeur clause? Like - "in the event of nuclear war we don't have to pay". Because if there are such clauses - look out. The CDS writers WILL find a way to get their FM clause invoked.
The problem is lending to government is based on the lender having faith that the government is backing that debt (full faith and credit). If lenders can no longer trust that the law is on their side in a default and that governhments can simply change the law to theri benefit, then lending to governjments will virtually halt (would you lend to someone who can change the rules so they don't owe you what you lent them). When goverhments can no longer borrow from private investors then every government will be screwed. The US could become insolvent overnight.
True - which also means all CDS is worthless... how orderly will that be?
The default will not be orderly. Next question.
Greetings, This may be a dumb question to many of you, but can anyone give me a laymans explanation of what "priced into the equities market" means?
"Sunnyvale Rest, a Home for the Aged - a Dying Place - and a common Children's Game called Kick the Can. It will shortly become a refuge for a man who knows he will die in this world if he doesn't escape...into the Twilight Zone."
The banksters and their CDS games... the default is obvious, even a 50% default... but the shitheads at Goldman, JP Morgan, et al, are able to warp reality and say this is NOT a default, avoid triggering CDS? And probably be covered by the Fed for any losses taken... There are no prosecutions because the governments are now owned by the banksters... buy gold, buy guns, store food and get rid of your wives.
<!-- /* Font Definitions */ @font-face {font-family:??; panose-1:2 1 6 0 3 1 1 1 1 1; mso-font-alt:SimSun; mso-font-charset:134; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:3 135135232 16 0 262145 0;} @font-face {font-family:"\@??"; panose-1:2 1 6 0 3 1 1 1 1 1; mso-font-charset:134; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:3 135135232 16 0 262145 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; text-align:justify; text-justify:inter-ideograph; mso-pagination:none; font-size:10.5pt; mso-bidi-font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:??; mso-font-kerning:1.0pt;} a:link, span.MsoHyperlink {color:blue; text-decoration:underline; text-underline:single;} a:visited, span.MsoHyperlinkFollowed {color:purple; text-decoration:underline; text-underline:single;} /* Page Definitions */ @page {mso-page-border-surround-header:no; mso-page-border-surround-footer:no;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} -->
Revolutionary footwear- Vibram Five Fingers shoes won great reputation and highly recommended by customers around the world. Made by Vibram, the design of five fingers shoes is according to human foot structure. Compare to traditional footwear in the shoes market, Vibram Five Fingers offer more health care and physical therapy to wearers. This five toes separated Vibram Shoes make you feel barefoot on the ground just like returning to childhood. Wear Vibram 5 Fingers shoes will improve balance and agility, meanwhile, efficiently protect wearers’ feet from injury. Wonderful massage function will come into play during your exercise. Wide range of Vibram Five Fingers sale in the Vibram Five Fingers UK online store, Vibram Bikila Five Fingers, Vibram Classic Five Fingers, Vibram Kso Five Fingers, Vibram Flow Five Fingers, Vibram Speed Five Fingers, Vibram Sprint Five Fingers, Vibram Kso Trek Five Fingers, Vibram Treksport Five Fingers,etc. Cheap Vibram Shoes in UK store available for men and women. Welcome to shop for reliable Vibram Shoes here, top quality Five Fingers Vibram will make you enjoy more healthier and natural activities.
Before deciding to buy Vibram Five Fingers, you should consult Vibram Five Fingers uk a specialist who will consider walking five fingers shoes, your stride, the type of Vibram fivefingers, weight and other Vibram shoes factors put you in the right shoe. The basic Vibram Five Fingers sale properties of walking Vibram Bikila FiveFingers should be flexible, flat Vibram Classic FiveFingers and the heel is not flared. When the Vibram Flow FiveFingers are flexible you will be able to bend and twist the Vibram Kso FiveFingers. When you go forward with your Vibram Kso Trek FiveFingers, your step will flex Vibram Five Fingers Speed Shoes White-Black as you roll through Vibram 5 Fingers Treksport Black a step from heel to toe. In other words, if the Vibram FiveFingers Bikila Women Sky_Blue-Grey is too stiff, your foot will fight Vibram Five Fingers Kso Women Black with every step you take. Make sure you invest in the right Vibram Five Fingers Sprint Mens Shoes Yellow-Black to avoid injury and keep you walking Vibram Speed FiveFingers in comfort and convenience.
http://www.vibramfivesfingers-uk.org
http://www.vibram-fivefinger-uk.net