Monday, February 15, 2010

Greece by the short hairs 

Those following the Greek debt crisis may have noted the revelation that Goldman Sachs helped structure a swap that allowed Greek to circumvent EU debt ceiling regulations. The transaction has now been broken down in grim detail over at Zero Hedge. Skipping the analysis and jumping to the harsh reality:

What is the real story, however, is that far from mere observable, on-balance sheet funding needs, Greek has suddenly found itself at the mercy of a Moody's, whose just one additional notch down, would increase the funding needs by almost 40% in addition to near term maturity requirements.
Yes, ratings triggers on the swap, if tripped, would force Greece into a default. (That of course assumes no bailout, which today at least sounded less likely).


By Anonymous Anonymous, at Mon Feb 15, 06:25:00 PM:


I'm the same Anon who has referred to Zerohedge in a few posts. I think we've swapped some comments on these comment boards.

If you haven't yet read the ZH post setting forth the interest rate sensitivity analysis of the U.S. debt you should do so. It is a fairly dense post but it is a fairly rigorous analysis of outcomes in different interest rate environments. It deserves a wide dissemination.

Synopsis: we're doomed.

Here's the link:

I can no longer come to any reasonable conclusion other than Obama & Co. are deliberately implementing a plan to destroy the U.S. dollar. Soros is an evil genius.  

By Blogger Charlottesvillain, at Mon Feb 15, 07:23:00 PM:

Indeed, I am growing resigned to a worst case scenario (although I have been conscious of the possibility for awhile, as some long time readers can attest). I'm always the last person to assume a sinister plot, however. Fiscal restraint is obviously not a dominant character trait among modern Americans, particularly the political class.

This is no Obama plot. It's been generations in the making, and the Republicans and Bush could have stepped up and changed our trajectory, but it's a lot more fun running up the credit card than it is to pay the bills. This is true at the state, local, and personal levels, and Obama and the Dems are just unlucky enough to step up to the trough late in the game, just as the chickens come home to roost. (Forgive the Tamarian narrative).  

By Blogger Dawnfire82, at Mon Feb 15, 07:28:00 PM:

It's more than bad luck, Charl. No one forced their tax & spend & borrow & spend agenda on them.

"reasonable conclusion other than Obama & Co. are deliberately implementing a plan to destroy the U.S. dollar. Soros is an evil genius."


By Anonymous Mad As Hell, at Mon Feb 15, 08:38:00 PM:

"Obama & Co. are deliberately implementing a plan to destroy the U.S. dollar"

I've feared this since back in June 2008 after digging into Obama's past as best I could on my own. Obama is a cold-assed abandoned child who got adopted by some very bad people. He's on a mission.

He's been terribly enabled by MSM. Don't the likes of Couric and Stephanopolous realize they have more to lose than I do? What never got reported on were Obama's favorite teachers at Columbia and Harvard Law. I wouldn't be surprised if they included Cloward and Piven at Columbia, and the crazy-assed "critical legal theorists" at Harvard Law -- that Obama was much more than a student -- and even more than an acolyte.

Shouldn't Summers and Geithner know better?

There are major countries with higher debt to GDP ratios, notably Japan. Why won't they blow up before we do.

Sidebar: I half believe the Goldman conspiracy stories. Goldman is just asking to get taken out. Old Wall Street adage: Pigs get slaughtered.  

By Anonymous Mad As Hell, at Tue Feb 16, 07:52:00 AM:

Mad As Hell follow-up.

What's saving us for the moment is that the rest of the World sucks more. There's only a few islands of relatively stability in the World, and they're comparatively small. If we were alone in our troubles, we'd have a run on the dollar -- Bernanke would have no room to maneuver. The dollar may hold up, because of this.

I'm no expert, but we seem to be following the path taken by Japan since 1990, but with these additional factors:

Savings: We've been bad, but we're starting to get good. This is an interesting phenomenon -- as it's defensive -- the environment for savings is actually bad. This can actually be a drag on the private sector, if the public sector just eats up the savings to cover its deficits.

Unemployment: Expect it to stay high. The true private sector is really bearing the brunt. Many sectors are feeling this disproportionately -- the young ... men -- especially the burly men that Nancy disparages. Normally the unemployed reject "tough love" and pull the lever for Democrats. But these sectors should know that Obama has no love for them. This is a real opening for Tea-Partied Republicans -- especially to capture the young.

There seem to be longer-term trends going on here that are working against employment. It's a big looming problem.

Deflation: Especially in residential housing.

Obama: I can't figure out how purposefully "bad" Obama is. In part, he's just "bubble boy" clueless. Obama has had no one in his life who held a real job, which is remarkable. I matured in the late 1970s -- and so had a lot of shithead ideas for along time, because of it. I can only imagine how narrow Obama is in his thinking. He really believes that he walks on water.  

By Blogger Georgfelis, at Tue Feb 16, 08:17:00 AM:

Yes but.... What does this mean for us in our mid-years who have a fairly medium amount (4x annual salary or so) in our 401k? Generally we have limited shuffling potential, so no yanking it out and stuffing it under the mattress, or converting it to little bars of metal. Leave it in the domestic market? I-Bonds? Small Caps? Medical Device stocks? (Oh wait, I see a conflict of interest there...)  

By Anonymous Anonymous, at Tue Feb 16, 09:31:00 AM:

@ Mad

"There are major countries with higher debt to GDP ratios, notably Japan. Why won't they blow up before we do."

Because Japan's debt is largely internal, not external. The relevant parameter for sovereign creditworthiness is external debt to GDP. As long as the debt is internal the government can finance it internally by increasing taxes.  

By Anonymous Anonymous, at Tue Feb 16, 10:07:00 AM:

Government here can also raise taxes (or inflate) to finance external debt, but either path is a crazy path given our difficult economic situation, and w=one would put us back into a Depression while the other would turn us into Weimar. Japan is better off because of their long history of higher savings rates, but deflation is a killer regardless of propensity for savings.

We're close to the edge ourselves. The Treasury needs to stretch out maturities asap, except that long debt has had trouble getting sold recently. That's why we're sunk- we can't seem to stop spending and the market is saying it doesn't want to finance any more US debt. It's only because Europe is in worse shape that we're still able to borrow at all.

Unless the political establishment can swallow a plan looking something like the Paul Ryan (ranking member on the House Budget Committee) "Roadmap For America's Future", we're going to go down. I'm not optimistic.  

By Anonymous Mad as Hell, at Tue Feb 16, 10:34:00 AM:

Re: Paul Ryan's plan ... this is a partial repost from below:

ABC's Jack Tapper did an interesting interview of Wisconsin Republican Congressman Paul Ryan earlier this week. Ryan has put out a realistic healthcare / entitlement reform plan as a platform for discussion. At his recent meeting with the Republicans at their retreat, Obama actually wound up having to speak about Ryan's plan ... as Ryan got a lot of air time. Obama called Ryan's plan an "entirely legitimate proposal."

In his later interview of Ryan, without prompting from Ryan, ABC's Tapper put out the facts to show that the Obama White House started an orchestrated disinformation attack campaign on Ryan's plan the very next day.

But while meeting with the Republicans, Obama said the following about Ryan's plan: "And I raise that not because we shouldn't have a serious discussion about it. I raise that because we're not going to be able to do anything about any of these entitlements if what we do is characterize whatever proposals are put out there as, "Well, you know, that's -- the other party's being irresponsible. The other party is trying to hurt our senior citizens. That the other party is doing X, Y, Z."

So anything like Ryan's plan is toxic, unless and until we have a crisis. Even then, Obama's in the way.  

By Anonymous Anonymous, at Tue Feb 16, 12:37:00 PM:

Democrats stand for expanding government spending and entitlements. So yes, I agree they're going to be in the way of solving our debt bomb. Lots of Republicans will be in the way too, to protect their favorite spending.

But we just can't borrow the money any more. The last three auctions have all had a mysterious direct buyer bailing out the Treasury, widely thought to be the Fed. Portfolios are getting pretty full of US Treasury securities, and investors are both slowing down their buying and are unwilling to buy long-dated maturities.  

By Anonymous Anonymous, at Tue Feb 16, 12:41:00 PM:

Addendum: Foreign demand for Treasuries drops by record amount.

You said something about a crisis? This is a crisis.  

By Anonymous Mad As Hell, at Tue Feb 16, 08:24:00 PM:

Bloomberg News: President Barack Obama may be heading for a clash with the bond vigilantes

Lone voice warns of debt threat to Fed

The US must fix its growing debt problems or risk a new financial crisis, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, warned on Tuesday, adding a mounting deficit could spur inflation.

Mr Hoenig said that rising debt was infringing on the central bank’s ability to fulfil its goals of maintaining price stability and long-term economic growth. “Stunning” deficit projections were putting political pressure on the Fed to keep interest rates low, infringing on its independence at the risk of inflation, he said.

He was the only Fed member who dissented at last month’s meeting against language indicating that interest rates should remain near zero for an “extended period”.  

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