Friday, February 26, 2010

Greece and the credit default swap threat

Anyone who has followed this site for the past year and a half is well aware of the obsession here with regulating credit default swaps. The premise is simply to require that anyone buying a CDS on a security has a position in that security that is more than or equal to the notional value of the derivative. That means that a CDS would be a hedging instrument and not a gambling instrument.

Investments can go up or down, but fear can push an investment to zero and the game is over. Fear of zero is intense and can be vulnerable to a contagion that is subject to manipulation. This may or may not be illegal manipulation and in the world of constant media coverage of every angle the access to legal venues for opinion or book talking venting is more or less endless. That's the case now in a world that has not psychologically recovered from the '08 to mid '09 financial terror.

The regulatory attention to and media coverage of the CDS market in the last few days and its magnified effect on the Greek government credit problems is not news here. In an interview here with analyst Kizziah Finney on December 8 he was quoted as saying, "if we are going 'down'(not Finney's words) again it will be sovereign debt with those same CDS derivatives"... as the culprit once again. On November 28 an ENS post on Dubai and on sovereign debt concerns elsewhere called the CDS market "a toxic security for sovereign debt problems".

That the Obama administration and other central bankers have failed to see this is inexplicable, but as said earlier this has been an obsession here. With Greece and parts of Europe now we are on the cusp of seeing a repeat of Latin America in the 1980's. Unlike then, when the great great majority of the debt was held on commercial bank balance sheets and a group of the largest bank creditors could be brought together to negotiate a restructuring, today the debt is widely disbursed. There are some banks that have crucially large positions but they do not represent any predominant percentage of a country's debt. So Greece could end up like the homeowner in Arizona saying, "One of us still has a job, we're stretched for now, we're looking for some solutions, but who do we talk to, the initial broker, the initial lending bank, the servicer, some government bureacracy, or the end buyer of a securitization. How do we get some authoritive answer, or do we just linger until it's over."

At the moment Greece has no way out. The CDS market money makers are just beginning to pounce. It would take a concerted coordinated effort by the Eurozone, the IMF, and some substantial input from the U.S. and even Tokyo and China to stop their designs. Will Greece get to play the Lehman role, scare everyone to death, and then Spain gets to be AIG, rescued because there becomes no choice.

Why are we having this discussion, if in fact we are, when the needed regulation of the CDS market and limits on the positions should be so obvious. In the autumn this was being discussed as part of financial regulation and the Obama team, behind the scenes, argued against any stringent regulation at the same time that Obama was castigating the banks for every sin possible. I don't get it, but here we go again.


Post a Comment

<< Home