Wednesday, June 22, 2011

Surely not US and UK

Greece Defaults—Guess Who Pays?

Next time your favourite "Euro"sceptic MP waffles on about default and market forces - ask them about US (and UK) insurance against Greek default.

Posted by mken @ 03:39 PM (1823 views)
Please complete the required fields.

4 thoughts on “Surely not US and UK

  • A couple of months back, a market-wise friend of mine said he was buying into Italian CDSs because he reckoned the risk of an Italian default was underpriced.

    I agreed. But then I asked him question:

    If we get a domino effect of sovereign defaults, what is the risk of it emerging that the banks who issued these derivatives are wholly unable to honour them, thereby rendering them worthless?

    I’m not sure that Buffet’s warning that derivatives were ‘financial weapons of mass destruction’ – has yet been fully appreciated..

    Please complete the required fields.

  • @UT,
    The Greeks will default in my view.

    The debt is just too large to handle – either by value or % of GDP. Someone needs to GIVE the Greeks money (or buy something from them), not just another loan – perhaps if they sold some stuff? Like a few islands….

    Beware the domino effect, there are a number of countries behind Greece in the loan request queue.

    Please complete the required fields.

  • alan,

    I don’t think Greece leaving the eurozone would count as a default, and they would then be at liberty to create new money to pay their debts, allowing the new currency to crash in value as they did so.

    Crashing the currency would then give tourism and other exports a huge boost, creating much needed employment in the process.

    A default doesn’t solve much, so this is the best way for the Greeks IMO – and the people who write CDSs would like it that way too..

    Please complete the required fields.

  • Greek default is “inevitable”, says Harvard professor

    A Greek default is inevitable, says Martin Feldstein, a professor of economics at Harvard University.

    The consequences of this default could potentially spell out further defaults in Portugal, Ireland and Spain as European credit dries up and the major European banks collapse, argues Feldstein in the Financial Times today.

    Feldstein says “with a debt to gross domestic product ratio of more than 150%, large annual deficits and interest rates more than 25%, the only question is when the [Greek] default will occur.”

    The challenge is therefore to postpone any default long enough for “the banks and other creditors to withstand the write-downs of bond values if Greece, Portugal and Ireland default simultaneously.”

    Feldstein agrees with the European Central Bank’s (ECB) proposal to encourage bondholders to ‘voluntarily’ agree to both capitalise the interest currently due in addition to providing “new multi-year loans at a below-market interest rate to replace the bonds that are now maturing.”

    .Feldstein continues to indicate the only way to get creditors to agree to these terms are to illustrate how it is in their best interests to do so.

    Both banks and creditors will want to avoid a defaulting scenario as it will reduce a bank’s ability to lend, the terms described by Feldstein will pass the approval of the ECB and banks will be pressured by their peers to take the deal as it is in everyone’s best interests, says Feldstein.

    “When the ECB eventually determines that major creditors have reduced their holdings of the impaired debt by enough so that, in combination with their increased capital, they are able to withstand substantial debt writedowns, the ECB will allow Greece, Ireland and Portugal to have a simultaneous default in which they restructure their existing debt to levels that they can comfortably service.”

    Spain is described as a major uncertainty in this scenario however as it is not yet clear how whether the “impaired assets” will be too large for the government to cover. “Spain’s potential debts are larger than the other three nations’ impaired sovereign debts combined”, says Feldstein.

    Even if the debt problem can be settled in this fashion, it will not change the fact that these countries will suffer from large current account deficits for years to come.


    Please complete the required fields.

Add a comment

  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user´s views and not the views of
  • Please adhere to the Guidelines

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>