|»The Daily Reckoning by Bill Borner|
Give disaster a chance to show its stuff
17 JUNE 2011
The euro lost more than 2 percent against the dollar in the past two days and the cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 78 percent chance that Greece won't pay its debts. Equities declined around the world, while a measure of fear in fixed-income markets jumped the most since November.On the streets of Athens, riot police armed with clubs swing at protesters, also armed with clubs. "Greece was plunged into political turmoil..." began the report in the Financial Times.
But what is really going on?
Greece, a small country with a small GDP and no oil...whose strategic export is olives...and whose last real military victory was the Battle of Jhelum in 326 BC, in which Alexander the Great defeated an Indian Rajah named Porus. But Greece is also as deep in debt as the US. But unlike the US, lenders don't want to lend Greece money. They've read the history books. They know what happens when you lend Greeks money. You don't get it back.
On the other hand, they also know that the European Central Bank and the financial authorities worldwide are afraid of a "Lehman moment." They fear disaster. They hate catastrophes. They think their job descriptions include avoiding calamities of all sorts.
Investors don't know quite what to think. The danger is high. But there are rewards too. Greek debt with a 3-year maturity is yielding 28%. If the authorities pull off another bailout speculators stand to make a lot of money on the long side of Greek debt.
But as we said earlier, it is because officials are so good at avoiding calamities that we find ourselves confronted with so many of them now. If they'd let Greece go broke 3 years ago, the problem would be behind us instead of in front of us.
Avoiding disasters hasn't worked. At least, not avoiding debt disasters. No matter what tricks the authorities do - monetary, fiscal, or unconventional - the debt is still there. And since all those tricks cost money...it gets bigger and bigger.
So how about this: Give disaster a chance to show its stuff. Let calamity have a go at the problem. Let's all put our hands together and welcome catastrophe.
It's coming, whether we like it or not.
So why not like it? Look, who really cares if a few big banks go broke? Who cares if Greece, Portugal and Spain - if it comes to that -- are forced out of the EU? Who cares if the bankers don't get their bonuses...or the speculators don't get their pay-offs...or pompous officials don't get to claim they 'saved the world economy?'
Of course, we don't really know what would happen if disaster were allowed to settle up things on its own. If the EU doesn't come through with another bailout, Greek banks - including its central bank - will be insolvent. And the European Central Bank may be insolvent too. It has an outstanding loan for $49 billion to Greece. It has a lot of other debt on its books too - from Spain, Portugal and Ireland. What that debt is worth today, you can find out by looking in the financial pages. What it will be worth after Greece defaults is unknown...but surely a lot less. And when the losses are toted up, they are likely to be more than the ECB's capital.
Then, the scheisse will really hit the fan.
What will happen? No one does. But we want to find out.
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EU commissioners have a "profound sense of foreboding" about Greece and the future of the eurozone, a leaked account of a meeting has suggested.*** Remember what a bad bet mortgage debt was? But in 2005, the more mortgage debt you had the smarter you thought you were. Mortgage debt meant you were making a leveraged bet on the housing market. As house prices rose, you multiplied your money.
The New York Times reports that another group of dumb-dumbs is making a similar mistake:
Debt has become a way of life for American college students. The average student loan debt among graduating college seniors was more than $23,000 in 2008, according to FinAid.org . In addition, the student lender Sallie Mae says the average graduating senior with at least one credit card had $4,138 in debt on the card.