Bond Vigilantes: "
The past couple of days have seen Greek debt take a bit of a battering. Spreads on Greek government bonds are the widest they have been since the inception of the Euro, and Greek 5yr CDS is wider by 100bps+ versus the beginning of the week. This seems to have been driven initially by nervousness around the anticipated bailout, with rumours that the Greeks are trying to renegotiate the deal that was announced on 26th March. More seriously though, Greek banks, who ironically were the ones responsible for buying a lot of recent sovereign issuance, have now asked for Eur14bn in loan guarantees from the government, perhaps due to recent numbers that showed as EUR10bn drop in deposits (4.5% of Greek GDP!). This could be the start of a bank run.
Looking to the relatively recent past one will find that Argentina underwent something similar. They went through their debt fuelled crisis in the ‘90’s, with a bank run in 2001 as Argentines withdrew money from banks and converted into US dollars, culminating in sovereign default in late 2001.
The parallels between the two countries are quite striking. Argentina used to operate a currency peg to the US Dollar (abandoned in early 2002), effectively the same as having a common currency, in order to keep a lid on inflation. Argentina therefore imported US monetary policy, resulting in an artificially strong currency, and this resulted in artificially high imports (which meant a steady outflow of US dollars from the economy). The currency peg also gave the Argentinian public access to cheap US credit, which they were less than reluctant to use. Greece too has spent the past decade or so borrowing at artificially low rates of interest.
Corruption and tax evasion in both countries exacerbated their problems. Admittedly appointing political supporters to Argentina's Supreme Court and an (alleged) illegal arms deals could be seen as more morally questionable than cooking the books, but where markets are concerned dishonesty on any level is a serious offence.
The levels of debt of the two however are not comparable. Unfortunately for Greece, they are starting from a considerably worse position than the Argentinians. In 2001 Argentina’s debt/GDP ratio and deficit as a percentage of GDP were 62% and 6.4% respectively. At the end of 2009, Greece’s debt to GDP was 114% and the deficit 12.7%.
After the Argentinian crisis, the IMF, who repeatedly lent cash to Argentina in the 90’s, produced an evaluation report entitled The IMF and Argentina 1991-2001. It’s quite a hefty piece but on pages 6 and 7 there is a list of lessons learned and recommendations on how to avoid mistakes in the future. To me, the most interesting lessons are lesson 9 ‘Delaying the action required to resolve a crisis can significantly raise its eventual cost…..’ and recommendation 4 ‘The IMF should refrain from entering or maintaining a program relationship with a member country when there is no immediate balance of payments need and there are serious political obstacles to needed policy adjustment or structural reform’. Recommendation 4 must be a particular worry to the Greeks. This crises has been dragging on for a few months now without any decisive action having been taken and disagreements between Germany and the rest of the Eurozone over whether/how to lend a hand could be viewed as a ‘serious political obstacle’. Clearly the disagreement is what has caused the delay in a resolution but the longer the policy makers procrastinate the more expensive an eventual bailout will get.
When Argentina defaulted, the government offered a debt swap valuing existing bonds at only 35% of face value, the worst recovery rate in sovereign debt history. 76% accepted these terms, but the rest didn't (and the holdouts are still fighting with the government today, which has locked Argentina out of international capital markets since it defaulted). With over half of outstanding Greek bonds still trading with a cash price in the 90s, if Greece does default (implied risk from CDS market is over 30% in the next five years) then investors potentially still stand to lose over half of their money.
A further worry is that when Argentina defaulted, the consensus (seemingly as now) seemed to be that there wouldn't be contagion (see here). True, initial contagion at the end of 2001 was limited, but contagion increased through the second half of 2002. Only a $30bn IMF loan prevented a Brazilian default in 2002, and Uruguay experienced a banking crisis and defaulted in 2003. Argentina's default resulted in borrowing costs increasing significantly in the region, and growth for all countries stagnated. What is particularly worrying is that, unlike with Greece now, Lat Am banks didn't actually have that much exposure to their neighbour's debt."
piatok 9. apríla 2010
štvrtok 8. apríla 2010
Cognitive Biases Potentially Affecting Judgment of Global Risks
Now, after global financial crisis, we all know what are black swans. People think they cant happen, but when they do, we make them more probable. Recently I read a paper from Eliezer Yudkowsky, which lists more example of biases we certainly use.
I highly recommend reading it.
Cognitive Biases Potentially Affecting Judgment of Global Risks
I highly recommend reading it.
Cognitive Biases Potentially Affecting Judgment of Global Risks
utorok 6. apríla 2010
Certificates of confiscation: Of bonds and bondage
The Automatic Earth:
Ilargi: Today we present another essay by our young roving reporter in Africa, VK, who links bonds to bondage, an interesting notion if only for purely linguistic reasons (and it goes well beyond those). It fits in well with some of the material I read and watched over the weekend, between trains, planes, automobiles and buses.
Some of the most interesting finance videos I’ve seen in a long time come featuring the likes of Jim Grant, Bill Black and Dave Rosenberg. Zero Hedge contributor Chindit13 describes banking in a country without banks as we know them, Myanmar. I’ve always said the only people who need our present banks are those that work for them and those that rely on them for campaign contributions. The rest of us need only access to our money, which we could have in a myriad of ways, most of which need not involve forking over more than we have in our accounts just to maintain that access.
And at the very least in essence VK is right, of course, no matter how one would want to enter any debate on the issue: every singly bond issued by your country, your municipality or the company you work for is a direct claim on you, or even your children. Knowing that record amounts of issuance are taking place these days makes that an all the more (de-)pressing realization. Which is why Jim Grant calls them "Certificates of confiscation". It's a valuable point of view when it comes to trying to understand that you will really actually truly have to pay back everything your government borrows to keep the "losers at the casino" banking system alive. And perhaps an incentive, also, to wonder what would happen if we did let those banks fail.
After all, you bailed them out to stave off a crisis, but here we find ourselves neck deep in that crisis regardless (a little fact hidden from us by mixed-up muddled-up accounting standards), only now without the trillions we dumped onto the crap table. They’re long gone. Last I heard they moved to Paraguay and the Caymans. Bill Black explains it well, once again: "To rob a country, own a bank". I’d want to add: or own a government (supposing that’s not the exact same thing anyway). That way you can issue bonds backed by "the full faith and credit of the American taxpayer. Well, I have a sneaky suspicion your credit is shot already, so it’ll all have to depend on your faith. How's that going for you?
Here's VK:
VK: Certificates of confiscation: Of bonds and bondage
Recently I had a private conversation with Automatix Earth contributor El Gallinazo in which he proceeded to chide me for my shortcomings in viewing the stock markets only, clamoring I should focus my attention more on the debt markets, since, as he so graciously put it, "the stock market is but a pimple on the debt markets ass".
I went surfing for knowledge as it were and noted the value of the world's stock markets as of November 2009 was about $44.2 trillion (That's a pretty big pimple!) while global debt markets were valued at $82.3 trillion.
What does this mean? I got out my notes on the debt market from my days not so long ago in University. And came across many long forgotten concepts: par values, coupon rates, zero coupon bonds, basic bond pricing, duration, convexity, credit risks,inverted price yield relationships etc. Aaaarrgggh!! Enough to make my head spin. Too much jargon is bad for you.
Then I stumbled upon a little line: Indenture: Agreement containing the terms under which money is borrowed.
That's what they call bond contracts. Indenture. According to the dictionary, or in this case a convenient google search, Indenture refers to a type of contract in the past that forced a servant or apprentice to work for their employer for a particular period of time.
What struck me was how true this is, not referencing past shenanigans, but present day reality. Society as we know it is indentured, we are virtual debt slaves, servants of our corporate and political elites.
Every time a sovereign, municipal or corporate bond is sold somewhere, every time you hear the national debt going up, that's a piece of you being sold off. There's nothing more to the bond market, nothing less. Human beings are being lined up on the chopping block, sold to the highest bidder, for a price.The future of their children and their hopes and dreams sold at a price determined by a large market for human debt slaves. A modern day global debt gulag if you ask me.
If you work for a corporation, the private debt issued by them promises to extract everything from you while they can milk you for all that you are worth. If the debt is issued by your country or town, the promise is to extract everything necessary to pay up from your you and your children.
Hence, in today's world, there are multiple claims on you, your life, your children and your hopes, dreams and ambitions, as well as theirs. The elites through various frauds, machinations, complex algorithms and at its heart plain greed for unbridled power have bundled you into little packages and sold you off many times over to the point that there are claims on your life, your soul and its third derivative.
Which brings me to the monster $1000+ trillion derivatives market (Exchange Traded + Over The Counter), which has been to a large extent built (leveraged) on top of the $44.2 trillion stock markets and $82.3 trillion debt markets.
At least in the pre-derivatives era a human life had been reduced to the value of the cash flow it produced over its lifetime, conveniently called Net Present Value.
In today's world, a human life has been further reduced to and by bets being played on a global video game network much like Call of Duty/ World of Warcraft, except in this case, you can't opt out nor can you log off. The consequences are very real, the outcome of suffering is inevitable. There is no reset button.
I can understand cattle not having a complex enough awareness to be able to judge their own imminent demise at the slaughter house, but people? Why, they have no excuse at all, we are a real tragi-comic bunch. Not only do we elect our herders and executioners i.e. politicians, we elect them with cheer, pomp and adulation, we also commend their choice of weapon, in this case being debt to wave away whatever happens to ail us. Debt, the very thing that we are slowly but surely being slashed with. Death by a thousand cuts if you will.
What will you tell your children? What excuse have you prepared? The numbers were too big? Economics is really confusing? I didn't realize I was selling you off at an auction? You'd almost think we're all delusional Catholics, sending our children to schools where they can be molested by hordes of conniving predators who, when pressed, won't shy away from calling themselves the victims. The Vatican and Goldman Sachs have way more in common than just the fact that both swim in luxury.
Next time you read that the National Debt has gone up by $1,600,000,000,000, that total debt owed by the US internally and externally is $54 trillion, that there are $65-100 trillion in unfunded liabilities, one thing I hope you take from this little rant is that you and your family are on the hook for all this debt owed to Kings and psychopaths, bankster mafia elites and drug lords with Caribbean accounts. I hope you also realize that they've decided to feast on your children with a sprinkling of shattered futures, dreams and hopes.
I'll sign off with The Automatic Earth's Ilargi's saying, "Tails you lose. Heads you die." Now that's a bet you never should have taken.
Some of the most interesting finance videos I’ve seen in a long time come featuring the likes of Jim Grant, Bill Black and Dave Rosenberg. Zero Hedge contributor Chindit13 describes banking in a country without banks as we know them, Myanmar. I’ve always said the only people who need our present banks are those that work for them and those that rely on them for campaign contributions. The rest of us need only access to our money, which we could have in a myriad of ways, most of which need not involve forking over more than we have in our accounts just to maintain that access.
And at the very least in essence VK is right, of course, no matter how one would want to enter any debate on the issue: every singly bond issued by your country, your municipality or the company you work for is a direct claim on you, or even your children. Knowing that record amounts of issuance are taking place these days makes that an all the more (de-)pressing realization. Which is why Jim Grant calls them "Certificates of confiscation". It's a valuable point of view when it comes to trying to understand that you will really actually truly have to pay back everything your government borrows to keep the "losers at the casino" banking system alive. And perhaps an incentive, also, to wonder what would happen if we did let those banks fail.
After all, you bailed them out to stave off a crisis, but here we find ourselves neck deep in that crisis regardless (a little fact hidden from us by mixed-up muddled-up accounting standards), only now without the trillions we dumped onto the crap table. They’re long gone. Last I heard they moved to Paraguay and the Caymans. Bill Black explains it well, once again: "To rob a country, own a bank". I’d want to add: or own a government (supposing that’s not the exact same thing anyway). That way you can issue bonds backed by "the full faith and credit of the American taxpayer. Well, I have a sneaky suspicion your credit is shot already, so it’ll all have to depend on your faith. How's that going for you?
Here's VK:
Recently I had a private conversation with Automatix Earth contributor El Gallinazo in which he proceeded to chide me for my shortcomings in viewing the stock markets only, clamoring I should focus my attention more on the debt markets, since, as he so graciously put it, "the stock market is but a pimple on the debt markets ass".
I went surfing for knowledge as it were and noted the value of the world's stock markets as of November 2009 was about $44.2 trillion (That's a pretty big pimple!) while global debt markets were valued at $82.3 trillion.
What does this mean? I got out my notes on the debt market from my days not so long ago in University. And came across many long forgotten concepts: par values, coupon rates, zero coupon bonds, basic bond pricing, duration, convexity, credit risks,inverted price yield relationships etc. Aaaarrgggh!! Enough to make my head spin. Too much jargon is bad for you.
Then I stumbled upon a little line: Indenture: Agreement containing the terms under which money is borrowed.
That's what they call bond contracts. Indenture. According to the dictionary, or in this case a convenient google search, Indenture refers to a type of contract in the past that forced a servant or apprentice to work for their employer for a particular period of time.
What struck me was how true this is, not referencing past shenanigans, but present day reality. Society as we know it is indentured, we are virtual debt slaves, servants of our corporate and political elites.
Every time a sovereign, municipal or corporate bond is sold somewhere, every time you hear the national debt going up, that's a piece of you being sold off. There's nothing more to the bond market, nothing less. Human beings are being lined up on the chopping block, sold to the highest bidder, for a price.The future of their children and their hopes and dreams sold at a price determined by a large market for human debt slaves. A modern day global debt gulag if you ask me.
If you work for a corporation, the private debt issued by them promises to extract everything from you while they can milk you for all that you are worth. If the debt is issued by your country or town, the promise is to extract everything necessary to pay up from your you and your children.
Hence, in today's world, there are multiple claims on you, your life, your children and your hopes, dreams and ambitions, as well as theirs. The elites through various frauds, machinations, complex algorithms and at its heart plain greed for unbridled power have bundled you into little packages and sold you off many times over to the point that there are claims on your life, your soul and its third derivative.
Which brings me to the monster $1000+ trillion derivatives market (Exchange Traded + Over The Counter), which has been to a large extent built (leveraged) on top of the $44.2 trillion stock markets and $82.3 trillion debt markets.
At least in the pre-derivatives era a human life had been reduced to the value of the cash flow it produced over its lifetime, conveniently called Net Present Value.
In today's world, a human life has been further reduced to and by bets being played on a global video game network much like Call of Duty/ World of Warcraft, except in this case, you can't opt out nor can you log off. The consequences are very real, the outcome of suffering is inevitable. There is no reset button.
I can understand cattle not having a complex enough awareness to be able to judge their own imminent demise at the slaughter house, but people? Why, they have no excuse at all, we are a real tragi-comic bunch. Not only do we elect our herders and executioners i.e. politicians, we elect them with cheer, pomp and adulation, we also commend their choice of weapon, in this case being debt to wave away whatever happens to ail us. Debt, the very thing that we are slowly but surely being slashed with. Death by a thousand cuts if you will.
What will you tell your children? What excuse have you prepared? The numbers were too big? Economics is really confusing? I didn't realize I was selling you off at an auction? You'd almost think we're all delusional Catholics, sending our children to schools where they can be molested by hordes of conniving predators who, when pressed, won't shy away from calling themselves the victims. The Vatican and Goldman Sachs have way more in common than just the fact that both swim in luxury.
Next time you read that the National Debt has gone up by $1,600,000,000,000, that total debt owed by the US internally and externally is $54 trillion, that there are $65-100 trillion in unfunded liabilities, one thing I hope you take from this little rant is that you and your family are on the hook for all this debt owed to Kings and psychopaths, bankster mafia elites and drug lords with Caribbean accounts. I hope you also realize that they've decided to feast on your children with a sprinkling of shattered futures, dreams and hopes.
I'll sign off with The Automatic Earth's Ilargi's saying, "Tails you lose. Heads you die." Now that's a bet you never should have taken.
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