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Wednesday, January 25

25th Jan - Assault on Default

Assault on Default
Why are the eurocrats so scared of triggering the CDS-contracts? I think pretension.  The current Basel-accord and ECB collateral practice accepts any OECD bond without haircuts or perceived risk.  Even though Greece has for all practical purposes defaulted, it will set a precedent – that no-one is safe. It would be much harder to insist that sovereign debt is risk-free. No wonder this is exactly what the IMF thinks is the top priority in order to solve the crisis: the sovereigns must again become risk-free. I don’t think that is possible anymore, the genie is out of the bottle and will not go back.
Even the idea that the default would mean giving in to speculators and start an avalanche of attacks on weaker sovereigns is ridiculous. The “attack”, or reluctance to hold assets deemed risky, has been going on for some time already.

Trichet’s Legacy
I believe the main point for default resistance is that ECB (and the constituent central banks, mainly Bundesbank) have acquired massive exposures to peripherial debt  through SMP and TARGET2. Even the LTRO can be considered to be part of this, as even though the assets are not owned by the ECB and are only collateral, what do you think would happen to banks’ balance sheets in a EU-wide haircut-day? And who would have to pick up the bill from that?

The apparently imbecile impeccable Monsieur Trichet is probably the story’s main culprit – he was one of the designers of this system, he was one of the people who accepted it and he was one of the people operating it – until it was ruined. Mario Draghi probably knows all this, but it takes time to change policy: one cannot change everything overnight, as instead of being seen doing the right things, one would be seen as another source of uncertainty. Also politics play a huge part. I don’t remember any sovereign ‘crat ever admitting that they had made a mistake. It is also considered bad form to point out other people’s mistakes. This is why we are here. Next time, please be somewhat less polite. If I can do it, so can you.

EURO CRISIS: GENERAL
In Europe, a Conflict Over Bank CapitalDealBook / NYT
Authorities want banks to get money from existing shareholders and cut bonuses. Banks would prefer selling unprofitable operations and deleverage their balance sheets.

Lessons for Europe’s fiscal union from US federalismvoxeu.org
EU tries to introduce balanced budget rules first, to reassure ECB and open up the road for further fiscal union. This leaves EU with less countercyclical tools.

Is this the end of populism in Europe?voxeu.org
What good might come from Europe’s crisis? Profligate governments in Italy and Greece, while pandering to the masses, have left their countries with crippling debt. This column draws parallels with Latin America and argues that the current hardship may sound a death knell for populism in southern Europe, as it has elsewhere.

EURO CRISIS: ECB
The ECB’s bazooka has hit the targetBond Vigilantes
Those who doubt the sustainability of the ECB’s policies are entirely correct when they argue that  hurling liquidity at the Eurozone debt crisis does nothing to solve the structural problems at the heart of the Eurozone.  If you put lipstick on a zombie sovereign or zombie bank, it’s still a zombie. 

EURO CRISIS: PIIGS
Paying Lip Service To Saving The EurozoneTestosterone Pit
So, they’re going through a drawn-out step-by-step procedure of demands for reforms, promises, failed implementations, rebukes, withheld bailout transfers that then might still be made, and so on. The idea is to keep markets from panicking, give governments time to prepare for the inevitable, and render politicians blameless for Greece’s exit from the monetary union.

Greece: What happens if bondholders hold out?Felix Salmon / Reuters
The most devastating effect, however, would probably be on Greek banks. The obligations of Greek banks, pretty much by definition, are less safe than the obligations of the Greek government.

Germany loses its gripMacro Business
…one of the major issues that brought on the crisis in the first place was the competitiveness imbalance of nations under the single currency…But Greece is not alone, it is becoming obvious that Portugal has got itself into a similar position…With Spain also struggling and Italy under increasing pressure, the continuation of contagion appears to be taking its toll on the politics of Europe with Germany’s ability to control the situation diminishing.

Hedge Funds Scramble to Unload Greek DebtDealBook / NYT
An estimated 4 billion euros of Greek bonds maturing on 20-Mar: Now, with momentum building in Europe for an agreement on a 50 percent-plus haircut to be reached before March 20 — one that would be legally binding on all holders — the smart money is not looking so smart anymore.

European Stress Reemerges As Risk Off Epicenter Following Portugal Admission It Needs €30 Billion BailoutZH
As Reuters reports, according to Antonio Saraiva, the head of the country's industry confederation, Portugal needs more bailout funds. €30 billion should do it. Great. However that means that all of the existing bonds have to get the same liens and security protections as any new IMF loan…In other words: Portugal does need more money, but under its current capital structure, there just is no place where said new money can come in cleanly and efficiently, while diluting everyone else.

OTHER
One Price To Rule Them AllThe Psy-Fi Blog
Review of Derman’s (Models.Behaving…) book.

When capitalism and corporate self-interest collideJohn Kay
The prescient, cynical Adam Smith had still not imagined a world in which the Wealth of Nations would cross the world digitally at the click of a mouse. Nor had he envisaged one in which legislation would be drafted by paid lobbyists.

Income inequality comes out of the igloo at DavosThe World / FT
For the first time ever, the issue of “income disparity” featured on the list of risks that WEF members expected to see this year.