Wednesday 17 March 2010

Greece another step closer to calling in the IMF

This time they're saying if Europe can't offer them a life raft by the end of this month, they'll go a-callin' to the IMF for help instead. They ask for Europe to put down a €30billion "loaded gun on the table", but will be "happy" with only €25billion -- sufficient to tide them over their earlier debts that come due for repayment by the middle of the year.

Unsurprisingly, the Eurocrats are still kicking the tires, trying to find a way of printing up money to give to the Greeks, while at the same time being able to tell their own voters -- and investors looking at whether or not to buy their own government bonds -- that isn't what they're doing.

My money is still on an ECB-sponsored underwriting of the Greek debt auctions for the next few months, by getting the big European banks to buy the bonds, with guarantees from the ECB that they will be repaid in full in the event that Greece has to ultimately default on those loans.

In other words, the ECB would effectively be writing "naked"[1] Credit Default Swap (CDS)[2] derivatives for the banks -- exactly what the european financial regulators are talking lately about banning hedge funds and large international commercial banks (such as Goldman Sachs, JPMorgan, Barclays, HSBC, Deutsche Bank, UBS, etc) from doing.

If they go ahead and do this, and Greece goes on to default, it'll be like someone turned on the money tap at the ECB and went away on a long vacation... Got gold?

[1] "naked" meaning "without being in possession of the asset being insured or sold"
[2] a "Credit Default Swap" is an insurance contract where the writer agrees to repay any ultimate financial loss on the insured asset to the holder of the contract, in return for an initial premium payment. These CDS contracts are unregulated instruments that can be freely traded among investors -- generally hedge funds and commercial banks, but they can also be traded by, say, pension fund managers, mutual fund managers, state or municipal government treasuries, anyone really -- if they wish to speculate on the likelihood of a default and to make money accordingly.

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