Jacob Wolinsky has some rather interesting remarks to the Greek debacle:


I myself have been trying to make heads and tails of what has actually passed – and these speculations need more or less constant revision as new information slowly percolate through our feeble minds.

First off: I totally agree with Jacob that the haircut is around 90% – not around 50%. To all intends and purposes a total loss, where only scab value has been salvaged. The other side of the coin is that investors have for years gotten an exceptionally high interest rate on their Greek sovereign bonds – thus have to varying extend already been compensated for their loss.

The Greek Debacle

But yes: A nation might go bankrupt without to many repercussions.

That advanced compensation is somewhat smaller than the eventual loss, as the “market” (i.e. the banks) thought they could bully the other EU countries into picking up the tab. They were wrong.

There has been a power struggle between the banks and the Euro countries where the bank and hedge funds counted on the internal divisions in the EU – and got their sums wrong. The weak link here was apparently Britain (not a Euro member) where City of London apparently wanted to smear off losses on the Euro countries. Anyway it led to an infuriated walk-out by Cameron.

But I return to the article in Financial Times Deutschland where there are some interesting graphs of the Credit Default Swap (CDS) positions of the larger banks.


1)    If memory serves me: The gross CDS position was around 17 bio. USD; but the net position was 2-3 bio. USD. There are three points to this observation:

  1. That the figures are quoted in USD is in itself indicative of speculation against the Euro.
  2.  The net position is only 10%-20% of the gross. This means that the majority of the bought insurance was owned to a very large extend by those who had sold insurance on the very same credit event.
  3. This means that the CDS did only to a very limited extend serve a legitimate insurance purpose. I.e. insure a holding of Greek sovereign bonds against a default. The majority of the CDS were lottery tickets.

2) The next point of interest in the graphs is that CDS positions on Italian and Spanish bonds have similarly been closed. This means a Greek default or bankruptcy is only a sideshow in a much wider context. This is clear as these Italian and Spanish positions are much greater (gross) than anything the Greek scenario can offer.
In effect it means that the major continental European banks in principle couldn’t really care if the Greek default was called a credit event or not.
3) There was some discussion on ValueWalk about the significance of which law the Greek sovereign bonds were issued under – specifically aiming at the Collective Action Clause (CAC) – or for the bonds issued under Greek law – the lack of such a clause. All of a sudden that issued seemed to be uninteresting.

Such strange observations indicate a somewhat hectic political activity behind the scenes.

The figures – published by Financial Times Deutschland – do not tell us very much about the positions – say 3 months ago. We do not know how many CDS have been bought back and quietly annulled. Even the present gross position does not seem exceedingly large in respect to the rather hefty loss suffered by the investors.

A sensible banker or investor would not carry a very large position in one security – however good the interest rate was – at the very least not without securing with a CDS. In that case the CDS position would be lopsided to balance the holding of the sovereign bond. This is obviously not the case – at least for the banks mentioned.

This could indicate that someone convinced the banks that CDS would not be paid out.

This is a striking contrast to the collapse of Lehman Brothers where the US-government had to step in and save AIG.

One way of doing that would be to reduce the total volume of CDS. That could be done by making it clear that there might not be a credit event at all! If that was the case the CDS would be worthless.

That would indeed have been a nasty surprise to Cameron and City of London. The point being that the ECB and Germany and France would NOT rescue the issuers of CDS – no matter what.

The remaining gross positions are probably triangular trades where Bank A has sold a CDS to Bank B that has sold to Bank C that has sold to Bank A.

The political message to the banks and hedge funds is quite clear: You have tried to “play” the Euro-zone in the case of Greece – and have not succeeded. The ISDA could call the “voluntary” arrangement a credit event all they liked; but it would be without substance – apart from the odd billion or two.

It seems like the EU has made a pre-emptive strike against the banks:

Greece is small potatoes. Far more important are Spain and Italy. The economic problems of Europe are serious enough in their own right, but it will not be tolerated that the financial sector compounds the structural economical problems.

Greece is a economy in the toilet: The budget is nowhere near being balanced and there will have to be major reforms in the tax collection department and the pension department. This sorry state of affairs is nothing new; so Greece will have to suffer the consequences.

Italy is much different –yes, there is the tax and pension problem – but the budget is not that far from being balanced. Spain has similarly an unemployment problem partially due to too generous pensions and inflated housing costs. But both these countries have kicked out the governments and instated an administration to rule the countries.

There has been the usual whining about infringements on democracy. The point is however that the democratic right of the population of Greece, Italy and Spain does not include letting the rest of Europe pay for their irresponsibility.

This picture is general all over Europe.

Take f.i. Belgium that has been through a long political crisis where they could not form a government. The message is reasonably clear to the populations in Europe: If you don’t elect politicians that take the necessary steps and overhaul the social democratic welfare state – don’t expect others to bankroll overly large public sectors and luxury retirement schemes.

It does not necessarily mean distress, but it will mean that wages and salaries cannot pay the expenses – unless these are reduced. These expenses are in their turn to a very large extent salaries, pensions and wages. We are truly entering into a long run deflation. What is definitely not needed is financial sector acting up like a spoiled child.

Let’s face it: Both the Euro and the EU has been strengthened this last half year. Why? Simply put: The cost of leaving the Union are very much higher than the hardship of living under a strict central control – the national political freedom has been squandered away on overspending: You always live on your creditors mercy.

Leaving the Euro? What should that bring about? Another trash currency at the mercy of the financial sector?

You could say Europe has handled the situation better than the USA handled 2008. Europe has played for time in the Greek question and used that time. But then  Lehman Brothers caught the USA unaware – that excuse is not applicable to Europe. Basically it has been prevented that the Greek tragedy spread to larger problems in Spain and Italy.