Thursday, August 4, 2011

It’s not just me saying it..

Italy 'to default' but Spain may 'just' escape

"Realistically, Italy is bound to default, but Spain may just get away without having to do so," - Don't waste your effort trying to prove me wrong, Flashman, as I'm off to London now - I have a meeting at the Chinese embassy and am then having an exes paid lunch courtesy of my friends in Commerzbank..

Posted by uncle tom @ 09:20 AM (4548 views)
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8 thoughts on “It’s not just me saying it..

  • Never mind, turmoil in Italy isn’t all bad.

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  • uc: There is no need to get so hot under the collar. Of course there will be some kind of default. What you fail to understand is that a managed/partial default makes things better, not worse, in the long run.

    When a debt gets unsustainable, both parties usually end up agreeing to modify the debt. That’s how it is and how it has always been. Only third world countries/dictatorships/juntas with no serious output or assets indulge in total defaults. Try to think of it in terms of a sweet shop. If a fat child buys 100 bags of Bon Bons a day on tick, you would value him as a customer. If he them threatened to stop coming in because he owed you too much money, you would wonder how you could still keep his custom and get back most of your money. The solution would look something like a managed default. You would have to let him off a portion of his debt and then, in future, only sell him what he could afford, without tick. Of course you could proudly refuse to let him off his debt and end up with no money and no future custom. Creditors rarely do this because they have to be pragmatic and because they ultimately have to take some responsibility for foolishly extending to much credit in the first place

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  • Flashman, how business like. I absolutely agree, my father was in business and that’s exactly what he did.

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  • Sir Harold M says:

    You are indeed correct Flashman, however the veracity of your analogy is not in dispute, I would express concern as to whjether it is appropriate or not.

    The said sweetshop owner as you say has no choice (especially if you have no assets for him to recover – although if you did he may be better off without your custom if he thought the recovery would outweigh the value of your custom, he may think that you would have no choice but to continue to buy his sweets long after he’s recovered his debt.)

    But let’s assume you are correct, and it is in his best interests to haircut and keep you spending. He can only do this because he controls all the receivables and needs future receivables.

    The holders of Italian debt may not feel the same. They may well feel that there is a good chance that they can recover most of their debt by calling a default and stopping Italy borrowing more until its been repaid, (after all Italy cant inflate it away so it’s PV will hold better), the holders of the debt may have no future interest in whether or not Ital can or cant afford to buy more sweets as they are lending to new cusomers with better credit such as Asian sovereigns.

    This too big to fail argument will bite the west on its behind in a big way as its all a game of fear and confidence. In these times people think about today and what they can grab from the mess and what they can put in their pocket. You cant eat an IOU and soon you wont be able to pay for food with them either.

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  • I expect the kid would have also wanted some Golden Wonder.

    [ducks down]

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  • When a debt gets unsustainable, both parties usually end up agreeing to modify the debt.

    Yes of course. They can have the Trevi fountain, then the Spanish steps.

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  • “I have a meeting at the Chinese embassy and am then having an exes paid lunch courtesy of my friends in Commerzbank.”

    Are we tweeting now?

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  • A sweet analogy.

    Bertie Bassett who runs a sweet shop down the road is retiring today, and after his last day of work he goes to collect his sherbet pension. It is only at that point he finds out his sherbet pension fund was invested in sweet shops where the fat kids have stopped paying because they never really had any money. So he is in for a bleak retirement and has much less money to spend in his local economy than he thought he would have.

    Not only that, but now word is getting out in the sweetshop industry that actually most of the fat kids have been living on credit for years and it is only that fact that has allowed most of the sweetshops to open and trade profitably in the first place. Now the fat kids mummies have said ‘no more’, the sweet shops are just not making enough money to cover their existing costs of buying sweets from China and paying their sweet mortgages. Sweet manufacturing jobs are lost in China which leads to instability and unrest. Banks are making increasing losses on their sweet mortgage books. Most sweet shops cannot run at a profit so close, meaning out-of-work sweetshop owners claiming money from the state. However the state is taking less income every day and has it’s own borrowings to worry about. Out-of-work sweetshop owners cannot now afford their trips to the lemonade parlours so the lemonade parlour industry is seeing falling income and instability too.

    What’s the solution? Hand out more money to the fat kids to get everything ‘back to normal’?

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