Wednesday, June 29, 2011

Greece wobbles at the Naked Olympics

This week is when Greece votes on so called 'austerity' measures. Measures they have been told to put in place before they are eligible for a $12 billion bridging loan from EU sources to roll over debt.

Much of the press and most euro-politicians blame the Greek people for this mess. They are 'lazy' (as compared to the Germans) they say. Wanting to retire at 54 years of age and receive 75% of their current salaries is just not Spartan enough.

But lets not be fair here and mention US public employees.  A system similar to Greece, where a Defense Department employee contributes to a federal pension that will let him/her retire at age 56, after 32 years of service. This has led to unfunded liabilities for military and civil servant retirement benefits of $4.7 trillion ($4,700,000,000,000).

So what are the Eurocrats concerned about with Greece? After all, Greece is only a country of 11 million people, how big can the coming catastrophe possibly be for such a small country?

Just print a few euros, call it something official, and get on with it.

But wait, there is more.

Naked Credit Default Swaps.

Wikipedia describes them as such:
A credit default swap (CDS) is a form of insurance that protects the lender in case of loan default. When a lender purchases a CDS from an insurance company, the loan becomes an asset that may be swapped for cash if the loan defaults. The difference between a traditional insurance policy and a CDS is that anyone can purchase one, even those who have no direct interest in the loan being repaid. This type of investor is commonly referred to as a speculator. In this case if the borrower defaults on the loan, both the lender and the speculator receive payment from the insurance company.
Naked is when a fund has no ownship of the debt they are betting against. It is just a bet. These derivatives are ruinous and should be banned. Naked CDOs amount to most of the market. They allow people to bet on Greece defaulting in the 'over the counter' market (ie off the radar market).

So when the tide goes out in Greece, we will realise who has their swimming togs on. And it won't be the boys with NCDO's. It will be the insurance companies who have underwritten the losses, who have taken the other side of the bet.

The most pressing problem with NCDOs, is that no one really knows how many of these things have been bet against Greece defaulting. No one knows what the level of insurance payouts on these things will be and which Insurers are exposed. Could a default by Greece cause an even bigger systemic failure than AIG or Lehmans?

This may be why the Eurocrats are anxious. Very anxious.

Greek men used to play in the Olympics in a naked state. Other men are now playing against them, naked, and may have stacked the odds before they arrive to play.

Gold in New Zealand dollars: $1862.73 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $54.08 per oz
Previous all time high: $48.58
per oz

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