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Archive for the ‘Sovereign Default’ Category

Oh no, it’s just Greece, right?  Uh, wrong.

BUDAPEST (Reuters) – Hungary is seeking an international credit line of 15 to 20 billion ($20 to $26.3 billion) euros, the secretary of state heading the prime minister’s office, Mihaly Varga, was quoted on Saturday as saying.

Hungary is seeking backup from the International Monetary Fund and the European Union to reassure investors it has financing even if it gets cut off from debt markets later this year.

Uh huh.  Remember that Hungary has been having some wee problems of late with regard to its government, the EU and IMF.

Hungarian bond yields are over 11%, which is not good at all in a world of ZIRP.  This effectively precludes most borrowing.

The problem with these pleas and “rescues” is that they continue to belie the real problem, which is that governments cannot continually borrow more than they tax.  It is simply not possible on a long-term basis for this to work, as compounding eventually gets you.  It might not immediately, but in the longer run it will with certainty.

Do I expect Hungary to eschew that which it must?  Not right away, and perhaps not at all until there’s a disaster, but in the end all governments must reconcile their budgets to this underlying fact — like it or not.

A default by any other name is still a default. When Greece defaults, the  inter-connected chains of credit default swaps will fall like dominoes.

For your Superbowl half-time reading, here is a brief summary of the situation in Europe:

1. Greece is poised to default, the end-game everyone anticipated in 2011. It is not a matter of if but when.

2. That default will trigger credit-default swap contracts, derivatives known as CDS that protect the owner from events such as default.

3. This will implode the shadow-banking system and the visible banking system, as those who sold the CDS (financial institutions) do not have enough cash or assets to pay the owners of the CDS.

4. The general idea is that sovereign default is very unlikely, so you can sell protection (CDS) against that possibility for a low premium, and cover that bet by buying your own protection from another player.

5. If that player (counterparty) can’t pay you off, then you can’t meet your obligations on the CDS you originated and sold.

6. So the failure of one counterparty can trigger a systemic failure akin to a row of dominoes being toppled by the fall of one domino.

7. To avoid such a CDS-triggered collapse, the European Union and its proxy agencies (European Central Bank, etc.) are attempting to call a default by Greece something other than “default.”

8. This will theoretically keep the first domino–a credit-default swap–from falling.  In other words, if we call a default by some other name, then it isn’t a default.

9.  Those absorbing the losses caused by a Greek default (and let’s stipulate that this references owners of Greek debt who bought CDS as insurance, not speculators who leveraged CDS at 30X the actual bond value) will want to cash in their insurance, i.e.  the CDS they own against a Greek default. They have every incentive to demand a default be  recognized as a default. If they accept the official plan to avoid calling a default a default, then all the losses will be theirs and none will fall to the counterparties who sold them  the CDS.

10. How is this fair?

11. The official response of avoiding default is focused on self-preservation, not fairness, justice or the rule of law.

12. The system can be likened to a pool of $100 bets leveraged off $5 in cash. If every bet is covered perfectly, then it’s somewhat like $95 in bets being paid by passing $5 around–much like the famous email that depicts all debts in a small town being paid by the same $5.

13. In the real world, somebody’s bets and insurance will not be perfect and their obligations will exceed their cash on hand. In other words, they will end up with $3 and owe $5. They will default and the dominoes will start falling as everyone down the line doesn’t receive their $5 counterparty payoff.

14. Empires tend to fall when the interests of their Elites diverge.  We are at such a point in the global financial Empire.

15. “Extend and pretend” has “worked” for almost 2 years. If Greece defaults and it is recognized by even one player as a default, then the system will quickly unravel and cash/dollars will be king until the deleveraging runs its course.

Charles Hugh Smith – Of Two Minds

It’s amazing, really, to read an article like this…

Greece and some other euro-area economies face years of financial struggle even if they manage to restructure their debts. Their prospects are so bleak that, according to one school of thought, they would be better off outside the euro system, despite the immediate costs of leaving.

We disagree, and not just because the immediate costs of an exit would be enormous. Even after that penalty was paid, resurrecting national currencies and regaining control of monetary policy would create as many problems as they solved.

….

On balance, debt restructuring plus “internal” or “fiscal” devaluation — difficult as it may be — looks preferable. Explicit wage cuts, and the recession needed to induce them, don’t have to carry the whole burden of cost adjustment. A combination of increased value-added tax and lower payroll tax (Greece could easily do both) mimics a currency devaluation by raising the price of imports relative to the price of exports, lowering real wage costs by stealth. They should be part of the mix.

…

Inside the system, the peripheral countries have learned a harsh lesson: They must hold growth in wages to the euro area’s rate of inflation plus any increase in national productivity. In countries such as Greece, this demands a new approach to wage bargaining by employers and unions. Overall, though, it should be no more difficult than managing a floating currency. And on this path the reward for success is greater: lower inflation rates and, with luck, faster economic growth.

Notice what’s missing from this article?

No discussion of how Greece wound up with all this debt in the first place.

A national government only winds up in debt when it promises to spend money it does not have and refuses to acquire through taxation.  It therefore chooses to borrow, which implicitly (for anyone but a psychotic entity) is a temporary statement of intent to both spend more now and then either spend less or tax more later.

The underlying problem is that this statement of intent was a lie.  The government never intended to actually spend less and/or tax more later on.  It simply intended to buy votes with a fraudulent promise to pay later on.  It never intended to actually cover the debt.

Yet Bloomberg’s editorial desk never points this out, nor do they point out the mathematically-inevitable outcome of these decisions.  Debt may never grow faster than output on a sustainable basis.  Not for you as a person, not for a company, and not for a nation.

The correct solution to such a problem as Greece has is to refuse to pay.  Period.  Default. 

On all of it.

Pay zero.

This, of course, will immediately cut off all non-tax-revenue funds from the government. It will not be able to borrow at any commercially-reasonable rate of interest for quite some time.  Perhaps a very, very long time.

This is good, not bad.

It will force fiscal prudence, not “austerity.”

Prudence is quite-simply defined — a government must have an honest conversation with the people it governs, and come to a decision on the amount of money that the people are willing to pay in taxes.  From these funds the government provides services, and only from those funds.

That’s it.

That’s how simple it is, and yet this is never, ever mentioned by Bloomberg — or The Journal for that matter, along with the other members of the “mainstream media”, even though it is both the obvious answer and the only one that is mathematically defensible.

Why not?

Because if such a premise gains currency — gains acceptance among the people — and they wise up, then the game here, in America, along with the rest of the western world, is immediately over.

Instead of ever-increasing leverage capital formation will come from economic surplus.  Instead of ponzi schemes government will exist on its ability to convince the public to pay taxes, allocating that revenue to services, and its reach will end there — for good or bad.

The power to commit fraud — by banks, by governments, by hucksters of all stripes — will be severely curtailed.  And with the curtain of obfuscation torn down the ponzi schemes of bogus asset valuations, intentional false claims of “solvency” and political promises that cannot possibly be kept as they amount to several times the gross output of the entire nation — will be forced to end.

Is September 20 Greek Default Day?

If Greece is going to default, September 20th seems to be as good a day as any. Actually, it is far better than most to be GD-Day.

Two big bonds, the 4.5% of 2037 and the 4.6% of 2040 both have coupon payments due that day, totalling 769 Million Euro.  So if the IMF wanted to avoid letting another billion euro go down the drain, September 20th would be a good day to do it.  The IMF seems to have delayed approving another tranche for now, so Greece must already have the money for this payment?

The Fed Scheduled their meeting for 2 days.  It now starts on September 20th.  Maybe a co-incidence, but what better way to be prepared for new emergency policies?

CDS “rolls” on the 20th.  On the 21st, all Sept 2011 CDS will have expired.  My guess is that banks own more protection than they sold to the September 20th date, so defaulting while those contracts are still valid would be a net benefit to the banking system.  As a whole, triggering CDS will likely benefit banks as I can find banks that say they own protection against positions, but find more hedge funds are uninvolved or have sold protection to fund shorts in other sovereigns.

We just finished the big finance minister meeting.  They can all return home, brief their staff and be prepared for Tuesday.  Prior to D-Day there were lots of last minute preparations to make sure everyone was on the same page and as prepared as possible.  Why not before GD-Day?

Papandreou cancelled a trip to the U.S. And Venizelos mentioned that Papandreou had to be in Athens for “Initiatives”.  If you ever wanted some hand holding from your leader, it would be at a time of default.  He would have to be in country to calm things and mention all the deals he put in place last week on the conference call.

None of the headlines from Poland or comments from the IMF seem particularly positive.  I can’t even find the customary all is good, we are working together, this was a time of great progress, boiler plate statement having been released.  Maybe they are waiting for Monday to let the world in on all the joyous
progress.  I suspect they are more likely to wait on bad news than good news.  They have often tried to control bad news over the weekend.  Maybe they have decided it would be better to deal with it real time.

There is still a chance we see some bold new initiative or plan, but as I wrote last week, every step and virtually every comment made, for the past 8 days, is consistent with preparing for a default.

Peter Tchir of TF Market Advisors for ZeroHedge

There’s really not much more to say than this….

Value	1,577.42
Change	593.840 (60.375%)
Open	1,577.42
High	1,577.42
Low	1,577.42

Source: Bloomberg (click link above)

No, that’s not a stock.  It’s the CDS spreads on the PIIGS (composite), and is up an astounding 60% today.

It’s over folks, despite the protests of BNP, which reacted in predictable fashion to a WSJ “opinion piece” this morning:

‘We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” a bank executive for BNP Paribas, who declines to be named, told me last week. “Since we don’t have access to dollars anymore, we’re creating a market in euros. This is a first. . . . We hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore.”

The bank denied it, of course, and the source “declines” to be named.

So what’s the truth?

It’s simple: We’re all Greece.

There’s no material hiring going on in the US, nor will there be.  Not because business wouldn’t like to hire, but because there’s no organic demand with which to require the hiring to take place. As a former CEO I can tell you that hiring is a dispassionate decision: You hire staff to produce the goods or services you sell – and for no other reason.

The Government took upon itself to create false economic demand after 2008 through deficit spending.  Private business knows this cannot continue forever, or you get Greece.  It’s not really very complicated; try using your credit card to maintain a $173,000 lifestyle when you only make $100,000 and see for how long you’re able to do it.  That’s what our Government has sequentially done for three years running from 2008-2011.

Every businessperson with an IQ larger than their shoe size knows that this path forward will – because it mathematically must – fail.  They were willing to accept a short-term incidence of this back in 2008, because that’s exactly what they believed it would be – a very short-term phenomena.

But now, in 2011, it’s clear that it isn’t a short-term phenomena.  And as a consequence there is no hiring going on, because this Ponzi must end, and when it does these businessowners know the outcome will be horrific.  They do not intend to get caught not under the falling knife, but the falling grand piano.

The President and the Republican candidates can claim to have “plans” or want “stimulus” or whatever.  The fact is that none of this will work.  It will not work because the claims of “deleveraging” and “balance sheet repair by consumers and households” is a lie.

Source: Federal Reserve Z1

De-leveraging and balance sheet repair?  Where?  Total consumer and mortgage indebtedness is only back to 2007 levels (when we hit the wall and we had a much-lower unemployment rate.)

The often-repeated claim that balance sheets at the consumer level have been “repaired” is a bald lie, repeated nearly daily in the media, in an outrageous and puerile attempt to goad both consumers and businesses into taking economically unsound steps.

This strategy of lie, lie and then lie some more has failed.

The only actual fix is to truthfully de-lever.  This means not supporting the bankrupt, other than shepherding them through the courthouse door where their bankruptcy proceedings are heard.  It may mean some sort of expedited process for bankruptcy, which I’ve advocated for quite a long while.

We need to remove one half of the total credit market debt in the system in the United States alone.  There are only two ways to do it – default and/or pay it down, or grow fast enough without taking on any more credit that the percentage of GDP represented by debt declines.

The latter is not going to happen because the entire last 30 years of our so-called “growth” was a Ponzi built upon more and more debt everywhere.  Yes, during Clinton, yes, during Bush (pick a Bush), yes, during Reagan.

This is the truth whether you wish to hear it or not.  Whether you wish to face it or not. And until we as a nation and the world as a whole stop playing pyramid games with debt there will be no actual and functional recovery.

We used currencies, offshoring and other means of market manipulation to cover up that which could not work on a sustainable forward basis.  We built the pyramid ever-higher, driving asset prices to the moon, and yet none of these “asset price” gains were real and underpinned by actual returned cash earnings.

The check is on the table folks. Europe was just as profligate as we were, and their banks were just as immature in their “analysis” before buying up debt – that is, lending people money who had no prayer in hell of ever paying it back.

This is the same game that was run in the 1980s, the 1990s with the Internet bubble, and then in the housing bubble in the 2000s.

In the 1990s when I ran MCSNet the claim of “trees grow to the moon” was predicated on the Internet doubling in size every three months.  This was true for about a six month period immediately following the introduction of Windows 95, which was the singular event that brought Internet access to the mass-market.

From that point onward it was a knowing and intentional lie.

Yes, penetration continued to grow and yes, the network continued to expand, but the explosive doubling pattern happened on the original “uptake” and then ended.  It had to, because if it had not every bacterium on the planet would have had internet access within a bit more than a decade.  This, again, is mathematics.

There were literally thousands if not tens of thousands of people who had access to the core routing tables and data flow rates that knew the claims being made were lies, myself among them.  Sure, as the type of data being moved went from plain text (Gopher and embryonic HTTP) to images to sound-and-graphics and then full-motion video the data requirements continued to grow but the fanciful claims of doubling every three months simply couldn’t have gone on for more than a couple of years because the following is what would have happened:

2
4
8
16 < End of first year
32
64
128
256 < End of second year
512
1,024
2,048
4,096 < End of third year (!)
8,192
16,384
32,768
65,536 < End of fourth year (!)
…..
4,294,967,296 < End of eighth year (!!!!!)

Incidentally, that last figure is approximately (within one additional three-month period) the number of people on the planet.

This is the problem with exponential (compound) growth.  It’s inherently a pyramid scheme and inherently must, at some point, end.  It must end because eventually you run out of ability to sustain it – you run out of suckers and the pyramid collapses.

This always happens because it mathematically must happen.

When debt grows faster than output on a compound basis the two curves inevitably run away from one another and must always result in a collapse.

This is not a political issue, it is not a left or right issue, it is a function of simple mathematics.  Those who were IPOing these businesses in the 1990s and who were building and selling houses into the ramp in the 2000s were simply believing that they would unload the bag on you before the leverage pyramid in that particular part of the economy fell over.

That’s all the last thirty years was folks, and now we’re desperately scrambling on a global basis to find just one more sucker.  To obtain just one more hit off the crack pipe.  To stave off death just one more day and draw one more breath.

Can we pull that off/  Maybe, for today.  Maybe, for tomorrow.

But on a forward, sustainable basis?

There the math is clear and so is the answer: NO.

Global equity markets are sinking again today, as the euro zone credit crisis  deepens.

According to the rumor mill, a default by the Greek government is not merely  inevitable, it is imminent. As a result, the cowboys up in Germany and France  are circling the wagons.

“Germany may be getting ready to give up on Greece,” Bloomberg News  reports, “as the credit markets signal growing concern about the smaller  nation’s ability to repay investors. Yields on Greek two-year notes rose above  60 percent today for the first time…

“After almost two years of fighting to contain the region’s debt crisis and  providing the biggest share of three European bailouts [to Greece, Ireland and  Portugal],” Bloomberg continues, “German Chancellor Angela Merkel is  laying the groundwork for what markets say is almost a sure thing: a Greek  default.”

Of course, a Greek default has been a sure thing ever since the European  Union and IMF started shipping euros down to Athens more than a year ago.  Bailouts, rescue packages and official protestations to the contrary are all  part of the “Inevitable Default Playbook.”

Over the weekend, Greek Prime Minister, George Papandreou, vowed “to save the  country from bankruptcy.” The Prime Minister promised, “We will remain in the  euro.”

Ergo, a default is both inevitable and imminent.

“It feels like Germany is preparing itself for a debt default,” says Jacques  Cailloux, chief European economist at Royal Bank of Scotland. “Fatigue is  setting in.”

The threat of a Greek default is not exactly a new story. In fact, it is a  very old story here at The Daily Reckoning. As early as February 2010,  your editors began linking the words “Greece,” “default” and “inevitable.” Your  editors would re-position these words from time to time, just to keep the story  fresh. But the essential message never changed: This thing that cannot possibly  last will not last. Greece will default. It’s inevitable.

But since inevitable is not the same thing as imminent, the financial markets  of Europe and the US kept powering ahead for months, without worrying about the  due date of inevitable.

Obviously, investors are worrying now. Stocks are suffering worldwide, and no  stocks are suffering more than European bank stocks. The share prices of  Europe’s largest banks are down 50% to 70% over the last three months. Here in  the States, the financials are also performing dismally. Just today, the share  price of Goldman Sachs dropped back below $100 for the first time since March  2009.

Somebody is worried…and that worry is also extending to the forex markets,  where the euro has dropped to 6-month lows against the dollar and 10-year lows  against the yen.

As investors scurry away from the risk of additional losses, they are also  fleeing a delusion that has been condemning their capital to inevitable (there’s  that word again) losses. This costly delusion is that central banks and other  governmental agencies possess the power to improve economic conditions.

For several months, at least, investors have been able to see that government  finances throughout the Western World were in shoddy shape…and becoming even  shoddier as these governments catapulted billions of dollars and euros into  their sluggish economies, hoping something good would happen.

Despite this obvious distress, however, global stock markets have been  rallying for most of the last two years. Why? Because investors trusted the  power of governments to overcome the forces of recession and debt liquidation.  Investors placed their faith in the gospel of omnipotent central banking, just  as they had always done since the days of Alan Greenspan.

But that faith is wavering. Investors are becoming disenchanted with their  golden calf.

The long-running faith in the power of central banking traces its roots to  the great American folktale, Maestro Alan Greenspan. Remember that  delightful tale? Alan was the guy who could steer a massive $13 trillion economy  just by tweaking one little bitty interest-rate. He was the guy who could  produce a rally on Wall Street, simply by raising his eyebrows a certain way  during congressional testimonies, or by clearing his throat a certain way when  discussing Fed policy.

Alan was the guy who always had the right answer, even when there wasn’t one.  He always knew exactly what to do, even when nothing should’ve been done. He was  more than a Maestro; he was a wizard. No one doubted his power to improve the US  economy. And he was also omniscient. He always knew what the proper level of  interest rates should be, even when Mr. Market vehemently disagreed.

Whether by luck or genius, Greenspan played a hot hand for many years. His “masterful” monetary policy received credit for placing two chickens in every  pot and an “affordable mortgage” in every household balance sheet.

As a result, investors not only placed their faith in Greenspan’s “power” to  produce economic growth (and stock market rallies), they also came to believe  that governments and central banks, in general, possessed the power to nurture  economic growth and/or dampen the effects of recession.

But as it turned out, Greenspan did not have all the answers. In fact, he did  not have any answers at all. He had gimmicks and quick-fix levers to pull — the  one constant ingredient being EZ credit. Greenspan responded to every  mini-crisis of his tenure by slashing short-term interest rates.

These quick fixes did not actually fix anything, but they did enable the US  economy to lurch from bubble to bubble until the financial system had become so  fatally levered that a large-scale credit crisis became inevitable.

The nation marveled at the Maestro’s golden touch, and revered his  reputation…until about 2007, when the Greenspan legacy came under review for  possible downgrade…outlook “negative.”

As the housing bubble burst, and the balance sheets of America’s largest  financial institutions began melting faster than the Wicked Witch of the West,  many American investors started to have second thoughts about the  wizard-formally-known-as-Alan-Greenspan. They began to realize that Greenspan  was merely human, and that central bankers do not possess superhuman powers.

And yet, vestiges of the “benign government intervention” delusion remain.  Some investors still trust the European Union to “fix” the Greek debt problem,  and clearly, some Americans still trust President Obama to “create jobs.”

Here at The Daily Reckoning, we do not.

We distrust central bankers to fix economies and we distrust politicians to  create jobs. But that does not mean we lack a belief system. On the contrary, we  possess a strong and enduring faith in politicians to borrow money and in  central bankers to print it. That’s what they do; that’s what they have always  done.

Trusting the power of central bankers and politicians may be a decent,  short-term trade; but distrusting that power is a great, long-term  investment.

Eric Fry
for The Daily Reckoning