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Bilifuduo (98.63)

Are Greek Fears Exaggerated?

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November 01, 2011 – Comments (11)

"This brings all of the concerns about Europe back to the front burner." - Scott Brown, chief economist at Raymond James.

 

Today, world financial markets nosedived when Greece's prime minister announced that the European intervention plan to rescue Greece's economy would be put up to a national vote. Almost instantaneously, this catalyzed vast amounts of selling, showing the disgust of world financial markets to Greek politics. 

 

Personally, I think the majority of the investment community is yelling "Chicken Little" and caricaturing doomsday scenarios when there is a good chance our pessimistic expectations of a Greek default, although strongly based and adequately reasoned, hinge on irrational fears. The worst factor of any crisis is the expectation, suspense, emotional pessimism, and the nailbiting, not the actual result.

 

But of course, time will tell.  

11 Comments – Post Your Own

#1) On November 01, 2011 at 9:21 PM, Frankydontfailme (27.46) wrote:

Greece is a side-show. When Italy's 2-year hits 200% modern finance will be over.

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#2) On November 01, 2011 at 10:26 PM, dbjella (< 20) wrote:

Frankydontfailme

Why do you think that?  Don't you think some central bank somewhere will step in and provide liquidity? 

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#3) On November 01, 2011 at 10:50 PM, Frankydontfailme (27.46) wrote:

It's not about liquidity. It's about solvency. 

With the precedence set that defaults do not trigger CDS payments, most major banks are worth a big negative number. So big in fact, that the  current value of all investment grade assets could not cover a single one of these banks failing. They claim they have no 'net' exposure - meaning if the billions they hold of European debt gets wiped out by default, they will lose nothing because they will be repaid for their CDS insurance. They will not be repaid a cent from CDS exposure. They can't be. The insurance companies go bust before they could even partially pay a single failed bank.

Bank of America alone (through their ownership of M.Lynch) has 50+ trillion dollars of derivatives. Which, by the way, has now been transferred to FDIC insured accounts, with the blessing ofthe Federal Reserve.

Sure, central banks will print. 100% chance. They will do anything in their power to prevent deflation. Deflationists haven't read a history book. Won't happen. Nonethless, when confidence in governments fail, printing will only fuel the fire.

Either hyperinflation, or a new reserve currency. Only possibilities. 

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#4) On November 01, 2011 at 11:42 PM, cbwang888 (25.40) wrote:

CDS again? Who is the AIG in this case?

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#5) On November 02, 2011 at 12:12 AM, walt373 (99.85) wrote:

Sure, central banks will print. 100% chance. They will do anything in their power to prevent deflation. Deflationists haven't read a history book. Won't happen. Nonethless, when confidence in governments fail, printing will only fuel the fire.

Not so sure about this. The ECB has been very reluctant to do anything resembling printing so far. Hyperinflation is still in the collective nightmares of Germans. I think they will be forced to print eventually, but it will be late in the game and they will tip-toe in. It's gonna be about as effective as an umbrella in a hurricane.

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#6) On November 02, 2011 at 5:21 AM, dbjella (< 20) wrote:

Thanks Franky

 

Walt373 - 

but it will be late in the game and they will tip-toe in. It's gonna be about as effective as an umbrella in a hurricane.

What does it mean "will be late in the game?"  Where do you think Greece, the European Union and other indebted countries are headed?   

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#7) On November 02, 2011 at 8:14 AM, Frankydontfailme (27.46) wrote:

I sympathize with that viewpoint Walt. However, when the real crisis comes, I have little doubt Europe will print. Ultimately, Germany may break away from the Euro for that reason. Which would all bust assure hyperinflation in countries like Italy and Spain.... scary stuff.

The US though, won't even hesitate. When our major banks start failing, it's print or die. We need the banks to buy our debt. Without them our interests rate rocket and we hyperinflate anyway.

 

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#8) On November 02, 2011 at 8:55 AM, Frankydontfailme (27.46) wrote:

Late to the party as usual, even a nobel prize winner can figure this stuff out (if he actually thinks and stops the political propaganda for a minute):

“The question I’m trying to answer right now is how the final act will be played. At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira.”

“Next stop, France.” 

"Doctor" Paul Krugman 

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#9) On November 02, 2011 at 3:18 PM, leohaas (31.08) wrote:

Thanks so much for speculating.

There is no market for CDSs. They are unregulated. Nobody knows who is exposed to whom, and for how much. Therefore, everything I read above starts off as 100% speculation and extrapolates from there. Using that strategy, you can "prove" whatever you wanted to prove. Including that doomsday is nigh...

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#10) On November 02, 2011 at 3:21 PM, walt373 (99.85) wrote:

dbjella, by "late in the game" I mean they will do it when their actions have already become too little, too late. They have been behind the curve this entire time. Instead of enacting policy as a preventative measure, they wait for the crisis to first occur and then take cues from the market.

Franky, I agree that the US has much more appetite for large scale government intervention, but it is fading. The mood in congress and popular sentiment continues to shift toward smaller deficit and no more bailouts. I doubt this will reverse unless something so serious happens that it convinces people that govt intervention is the lesser of evils.

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#11) On November 02, 2011 at 6:27 PM, Frankydontfailme (27.46) wrote:

lehass - not speculation. Actually the cds and how they are distributed are irrelevant. The cds did not cause the 2008 crises, only added to the flames. Derivatives are not evil. Insurance is not evil. No need to be regulated.

Moving on. The problem is not with the insurance but what the insurance underwrites. Sovereign Debt. The sovereign debt is a ticking time-bomb. It doesn't matter when it goes off. It doesn't matter who thinks they are protected with cds insurance, no one could ever pay that amount of insurance anyways.  

 Walt- I think that will change fast when we go into a recession and unemployment spikes. That, however, is speculation. But, we've never had a crisis where we didn't print (since FDR at least). Also, regardless of our economy, when major European nation's start to default as they must (like they did in the 1920's), our banks will go under. You don't think we'll print when B of A goes under? 

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