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Posted by on Oct 30, 2011 in Europe, TG Roundup

Greek (Haircut) in Plain English

From the (THINGS THAT MAKE YOU GO Hmmm) article linked via Scribd. Other than saying this is exactly what I was saying on my show on Friday (Oct 28 – Telugu podcast will follow), no further commentary needed:

With the carefully-orchestrated way in which the word ‘voluntary’ was unceremoniously shoehorned in front of the word ‘haircut’ this week and the unsurprising complicity of ISDA in declaring(seemingly with a straight face)that a failure to receive 50% of your investment back some how does NOT constitute a credit event, yet another problem was ‘avoided’. However, avoiding that problem today (namely more huge losses for the banks who, along with holding long positions in sovereign debt themselves, wrote CDS protection on for other holders of that same debt) could mean that tomorrow brings a whole new set of woes for two obvious reasons:Firstly, there is no doubt in my mind that in very short order, the lawsuits will begin to cascade down from the holders of those CDS contracts. These holders have VERY deep pockets and stand to make or lose enormous amounts of money should this be allowed to stand. they will NOT go quietly – that you can be sure of.Secondly – and this is where the whole thing comes full circle – by ensuring CDS protection on sovereign debt doesn’t pay out upon default of the bonds, the Eurocrats have shot themselves in both feet simultaneously because they have taken away the most effective hedge for people buying government bonds.For a region looking to rollover hundreds of trillions of Euros in the debt markets in the next couple of years, this step has more or less ensured they will have fewer buyers. Fewer buyers means higher yields. Higher yields means…. well, trouble – and that’s without allowing for anyone having to sell their existing holdings because it has been demonstrated that their hedges are ineffective.

Hmmm October 30 2011