The Economist, hypothesizing an unattainable federalized Euro-Fed, says, "If you were sitting down with a blank sheet of paper, you would advise the euro zone to complement its one-size-fits-all monetary policy by pooling sovereignty and creating new institutions, [...among other things...] a bail-out fund could ensure that large European banks were not at the mercy of their vulnerable sovereign borrowers."
That's a touching show of sympathy for the creditors. And, looking at how the US fared with its massive intervention and how scary things were looking in Europe for a while there, you might conclude that bail-outs are the lesser evil. We'll have to wait and see how this looks in 5 or 10 years.
Greece asks Angela Merkel and Nicolas Sarkozy for a hundred billion Euros as concerned and inexplicably naked investment bankers look on.
Some say the big mistake the US made was letting Lehman Brothers go under. Some say the mistake was in the inconsistency of how Bear Stearns was handled compared to Lehman.
Whether an investment bank or a small sunny country with lots of islands, "too big to fail" applies either way. Maybe Greece isn't, but Spain might be and Italy even more so. While Greece and Spain both have long histories of default on debt (according to my dedicated research staff), Italy does not.
What's needed is a mechanism, an orderly well-defined processes, to handle failure of large systemically connected entities, whether they are corporations or governments.
Defaults happen. It's only common sense that we should have a means for resolving default, while minimizing damage and preventing problems from spreading to weaker neighboring nodes in the densely connected social network of finance.
That shouldn't mean protecting creditors or borrowers from the consequences of poor decisions.
The so-called "voluntary" hair cuts for holders of greek bonds, an attempt to avoid triggering credit default swaps, appear to have failed. But, what if they hadn't? Or pressure from some country whose investment banks had underwritten CDS's had influenced the terms of a bailout? Some speculate that was back story behind Timothy Geithner's trip to Europe in December.
In that context, credit default swaps are a device for leveraging moral hazard.
Credit-default swaps on Greece cover $3.16 billion of debt, down from about $6 billion last year, according to the Depository Trust & Clearing Corp. That compares with a swaps payout of $5.2 billion on Lehman Brothers Holdings Inc. in 2008. The actual payout on Greece will be “much smaller” than the net amount reported by DTCC, Pickel said. A gross $68.9 billion of contracts were outstanding as of March 2 before accounting for offsetting trades.
Amazingly, after the AIG debacle, there's still no disclosure requirements for CDS exposure, so it's hard to know the extent to which US banks have sold CDS on European Debt and net exposure is even harder to guess. It looks like some of that exposure got unwound in to past few months. You can bet, a lot of it ended up in the laps of taxpayers, just like last go 'round.
No comments:
Post a Comment