Greece: if austerity doesn't work... Try more austerity! | 287 comments (287 topical, 0 editorial, 0 hidden)

Re: Outstanding balance: 75 billion (4.00 / 2)

Well, that greatly simplifies matters.

The private sector has now had its haircut. The ECB can commence with the rolling over at par.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 15th, 2011 at 12:47:06 PM EST
[ Parent ]

Re: Outstanding balance: 75 billion (none / 1)

Trouble is, to "roll over" you have to buy new issues and the ECB cannot buy from Greece at issue.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 01:02:19 PM EST
[ Parent ]

Re: Outstanding balance: 75 billion (none / 0)

That's true, but not something that cannot be solved by laundering the issue through the Hellenic Postal Bank.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 15th, 2011 at 01:34:49 PM EST
[ Parent ]

Re: Outstanding balance: 75 billion (none / 0)

Can they purchase on the secondary market?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Jun 15th, 2011 at 02:02:13 PM EST
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Re: Outstanding balance: 75 billion (none / 0)

Yes, but they don't want to.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 02:03:59 PM EST
[ Parent ]

Re: Outstanding balance: 75 billion (4.00 / 2)

Fortunately, that problem can be solved by the judicious application of political pressure.

Time to dust off the embarrassing photos of Trichet, or the stress tests of German banks...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 15th, 2011 at 02:22:29 PM EST
[ Parent ]

Re: Outstanding balance: 75 billion (4.00 / 2)

IOW, everything that doesn't promote Pillage is forbidden.

Greek 10 year bonds are now trading at 17.73% interest rate. Two year notes are at 28.15%. Somebodies are going to make a whacking pile of money using this in the Dollar/Euro Carry Trade.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Jun 15th, 2011 at 02:26:21 PM EST
[ Parent ]

Re: Outstanding balance: 75 billion (none / 0)

CDS spreads are at 16% but nobody wants the CDS insurance payouts to be triggered.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 03:06:40 PM EST
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OK, whatever (4.00 / 3)

I could get somewhat miffed, at this point, at the "Let's Play Central Banker" game going on but there's nothing I can do about so there's no point.

Instead ...

LOOK!

It's a Bright Shiny Object!

(cool)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Jun 15th, 2011 at 03:47:35 PM EST
[ Parent ]

Re: Outstanding balance: 75 billion (none / 0)

Just because you have a CDS swap supposedly covering your investment doesn't mean that your counter-party will be able to pay if it is triggered. After all, the whole point of CDS swaps was to enable you to treat risky junk as though they were AAA investments and relieve you of the obnoxious reserve requirements. No one ever thought they would have to pay up and many probably won't. So everyone is afraid to find out.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jun 15th, 2011 at 04:48:17 PM EST
[ Parent ]

Re: Outstanding balance: 75 billion (none / 1)

Just because you have a CDS swap supposedly covering your investment doesn't mean that your counter-party will be able to pay if it is triggered.

Granted, but if you buy CDS protection it's because you expect to be paid in case it is triggered, right?

Right?

Um...

the whole point of CDS swaps was to enable you to treat risky junk as though they were AAA investments and relieve you of the obnoxious reserve requirements

Okay, let's parse this.

The following table applies for its risk-weighting:

Claims on sovereigns and their central banks will be risk weighted as follows:

Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated
Risk Weight 0% 20% 50% 100% 150% 100%

A triple-A bank has a risk weighting of 20%.

Capital is 8% of risk-weighted assets.

So... take a Greek bond.

Before the crisis started, Greece was in the category where its bonds had a risk weighting of zero. So, holding a Greek bond costed no capital.

Now, Greece is rated below B, so its risk weighting is 150%, so the capital charge is 8% times 150% or 12% of notional.

You can buy a CDS at a 16% annual premium. The capital charge for the AAA CDS is 8% times 20% or 2%.

So, does it pay to free up 10% of notional from the capital charge, at the expense of 16% annually in CDS premia? I don't think so.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 05:07:21 PM EST
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Re: Outstanding balance: 75 billion (4.00 / 2)

The example I had in mind was Goldman and AIG. AIG had lost effective internal controls when the former CEO departed and insured below reasonable cost. I do not know if buying a CDO makes sense to free up capital if the CDO is properly priced. I will bet that lots of CDO issuers on Greek debt would be happy to give back premium they have received and then some to be off the hook on those CDOs. And even good rocket scientists make rockets that explode.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 16th, 2011 at 12:41:13 AM EST
[ Parent ]

PN (none / 1)

Not CDO (Collaterallised Debt Obligation - a kind of Asset-Backed-Security) but CDS (Credit Default Swap).

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 01:56:27 AM EST
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Re: PN (none / 1)

Yes, I realized that, but yesterday was a day from Hell! I will make a post in the OT.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jun 17th, 2011 at 02:24:46 PM EST
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