GREEK DEFAULT: WHAT A TRAGEDY

March 19, 2012

March 6: In my blog post, I stated clearly that Greece would and should default. 

March 9: The International Swaps and Derivatives Association (ISDA), which rules on such matters for the credit-default swaps (CDS) market, finally determines what everyone else in the world knew for some time…..that Greece is in default.  Greece desperately tried to dodge a default by forcing creditors into its debt restructuring plan.

The full-scale manipulation of the process to try to prevent recognition of the default was truly shameful.  Evidently, there is no contract or rule of law that European and US governments are not willing to change at their whim when it suits their own interests.  

With the default declared, the ISDA announced that an expedited auction would be held on March 19 to determine the net payout of CDS.  It has been reported in a number of venues that the net value of CDS outstanding is $3.2 billion.  In other words, payments will equal the face amount of the CDS contract minus the recovery value of the underlying obligation, so says the ISDA.

This number could quickly multiply if the counter party who is expected to pay off the losses is itself unable to make the payments.  Then, those expecting to be paid get stuck with losses instead.  Remember when Lehman Brothers had to declare bankruptcy in 2008, and AIG, together with most of the large US banks, had to be bailed out with taxpayer money?      

I have a feeling the truth about this will be hidden from the citizens of the world until absolutely necessary.  At the earliest, it might happen next month, when they have to announce 1st QTR earnings.  By then, they will have had enough time to work their hocus pocus to make us all feel lucky to have them running the financial engines of the world.  Then we will, as dutiful taxpayers, recapitalize them all yet again.  What an awesome business model!   Take huge risks.  When you win, slap each other on the back and pay yourselves millions.  When you lose, simply have the taxpayers give you all your money back so you can try it again, with the thanks of a grateful nation and the protection of a grateful, but corrupt government.  After all, it is in all of our best interests to have a healthy national banking system.  Besides, they are just too big to fail.  Isn’t that what they tell us?

I hope this kicking of the Greek debt down the road will suffice for some time, because I am really tired of hearing about it.  Yes, that’s right.  The “negotiated settlement” with the bondholders that has been a true declaration of default only deals with part of the problem.  Greece immediately is granted billions more in loans and their debt load will continue to grow.  Besides, it is time that the markets now shift the focus to Portugal, Spain or maybe Ireland, for trouble from one or all of them is surely ahead.

John Mauldin recently wrote: “There will be contagion,” in one of his weekly letters.  We both fear that the Greek tragedy may become a European one and maybe even an American one.

November 22, 2012:  I stated in my blog post: “the European Central Bank (ECB) is being called upon to print new euros for the purpose of buying bonds issued by the weaker southern members of the EU –Greece, Italy, and Spain. Of course, by mandate, the ECB cannot do this. Never fear, they will surely figure out a way to ignore any rules or laws that would prohibit it. They always do. Once they find or create a loophole, the ECB will start printing. The euro will fall and the dollar will rise… at least until the world understands the Fed intends to be the borrower of last resort for the Europeans and then they will know the dollar is also at risk for the same reasons.”   That turned out to be a good prognostication, since that is exactly what has happened.  However, even the mighty Federal Reserve cannot backstop all of Europe without destroying us too.  Maybe some are figuring this out since recently US Treasury yields have started to rise.

It remains unseen why Greece decided to go through this mess.  My advice for Greece is the same today as it was a few weeks ago: “Default, reinstate the drachma, devalue the currency, wipe out the debts, and start over like Iceland.  Control the timing and the process.  It is better for the Greek people if they get out now, while Europe will share its pain.”

Sure, it will take a few years to set their economy straight, but in the long run, they will be much better off.   If they stick to the euro, and their current debt, their debt to GDP will continue to rise.  Get out while you can and start down the road to recovery!

_____________________________

Randy  M. Long, J.D., CFP®, President
Long Investment Advisory, Inc.
 
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