Friday, January 20, 2012

Tails I Win, Heads You Lose


After, reading various articles about the state of Greece, one can get befuddled as to how Greece got into this mess and why they cannot get out of it. Or even understanding the implications.

After all, it is just debt and debt can be covered in many ways, least of all by money printing. Well, as we know, Germany doesn't like the presses. Phoney money destroyed their middle-class in 1923 with hyperinflation. Printing makes them nervous.

The other way is to reduce the debt by restructuring it and making the holders take a loss. However, this is a bit sticky. Why, because of large the funds that own the Greek debt and the unregulated and huge credit default swap insurance derivative time-bomb.

It appears that the large funds around the globe, that actually own Greek debt, don't care about a good outcome. Any outcome will do as they will win either way.

Here's why.

The current negototiations around restructuring Greek debt revolves around asking (and the important word is 'asking') fund mangers to take a reduced bond value and interest rate on their current holdings. Now, 'asking' is important because if Greece underwent a hard default the credit default swaps insurance (the insurance the funds took out on the bonds) would activate and payouts to these fund managers would begin in full.

But it looks as the 'asking' option is not to the fund managers liking. After all, they would lose. They have the upper hand with the CDS insurance on this debt. They will get paid in full when default occurs. Why would they want a voluntary haircut on value?

But it's brinkmanship of the highest order. What if the triggering of insurance causes the world financial system to implode? Then fund mangers would get nothing. Maybe, but perhaps their central banker friends could still step in and print some bailout funny money to steady the system. Like the AIG bailout in 2008, it could happen.

Either way, it looks like the big fund guys win again and the middle-classes will lose. Now this is not a particularly 'left-leaning' blog, but if the funds win here, value will need to come from somewhere and as in Germany during the Weimer hyperinflation, it came from the middle-class. Hard-workers who do not deserve this.

Who says history doesn't repeat.


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