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Perusing the pipes and tubes as usual and I came across an interesting article at Zerohedge, The ECB Has Opened Pandora’s Box.
I am not going to speculate about anything this morning. No guesses about what the Finance Ministers might do on Monday, no simple addition or subtraction that the data used to forecast Greece’s return to a 120% debt to GDP ratio is a falsification of the numbers, no mention that only nineteen cents of any bailout for Greece would actually go to the country; I am not going to discuss anything except what the European Central Bank has actually done and what we now know with a one hundred percent (100%) certainty and the horrifying implications of their actions.
The last bit is particularly alarming. 100% certainty? Horrifying implications? These aren’t nuanced words being used. They are dramatic and, even though I must honestly say I’m not really sure what this is about (ya, I’m ignorant about economic details at this level, I admit it), they bother me. One does not use “horrifying” as lukewarm adjective.
So what’s the deal?
The ECB, on its own and without judicial or parliamentary review, has swapped their Greek debt for new Greek debt that is not subject to any “collective action clause.” They did this unilaterally and without the consent of any other sovereign debt bond owners of Greek debt. They did this without objection of any nation in Europe. They have retroactively changed the indenture, the contract made by Greece with all of the buyers of their bonds, when the debt was issued.
Ya, so what? Isn’t this just the standard neo-lib mantra of our contracts are sacred, but yours are toilet paper substitutes (here, watch how I wipe my billion-dollar derriere with your “contract”)?
We know now that the ECB can retroactively change the rules, change an indenture, so that if the ECB can do this with Greece then it can certainly do it with any sovereign debt in Europe. If they can exempt themselves from a “collective action clause” then they can exempt themselves from any clause, in any sovereign indenture, for any European country. The fact that they are now clearly senior to any other bond holder, or more aptly put, that any private bond owner is now subordinated to the ECB is one consideration but hardly the most important one. The incredibly grim reality now is that any European and all European sovereign debt can have their indentures changed by the ECB when it is to their advantage.
Ok, that is not good for investors in general. And of course a country’s sovereignty becomes nothing more than rhetorical comedy. Which is what I think he’s saying. But what I think about this and what I know are vastly separated. So to anyone with some econ background, can you please help me understand if this is what he is saying?
It is the “collective action clause” today but tomorrow it could be the maturity or the coupon or any other terms and conditions in an indenture. It is Greece today but tomorrow it could be France or Portugal or Italy. The “Rule of Law” has been abrogated and tossed aside in the name of political contrivance.
Now that’s what it seems like is being said. So basically the ECB gains complete and total control. They never lose. They just change the rules. Right?
Since the ECB can now retroactively change any bond contract to whatever it likes and with any nation in its dominion then the valuation of European sovereign debt must be re-examined for what it really is which is no longer what anyone previously thought. Starkly put; the bonds issued by the sovereign nations in Europe are no longer pari passu, on equal footing, with the bonds issued in the United States. We have just passed a clearly defined “break point” where the legal rules were changed to the great disadvantage of all the private debt holders.
Did the ECB just take over most of Europe, ie. is that the potential future implication? Ok, this may be hyperbolic reasoning. Is it?
The consequences of their horrendous mistake will soon be upon them as institutions not coerced or forced into buying European sovereign debt will be leaving the playing field en masse as the realization dawns upon investors of just what has taken place.
If investors leave “en masse”, doesn’t signal serious problems for Europe in general? Wouldn’t this loss of investing capital, if they actually did leave, plunge most of Europe into a serious economic crisis, most notably those countries already on the edge?
I honestly don’t know enough about economics to make an informed judgement on this article. But “Tyler Durden” sure does seem pissed. If anyone at FDL with some Econ backgrounds can educate me, and others, as to the true implications of these actions, it would be most appreciated.
29 Comments
Honestly not sure how bad this is. It sounds bad and Tyler sure is … concerned. So help those, like myelf, who are Econ-challenged.
Hummm…Tyler does go over the top on occasion but….we have both Sarkosy and Merkel and their parties looking increasing like they will be out the next election.
And if this whole thing goes sour, they are history.
Also this.
[emphasis mine]
http://www.guardian.co.uk/world/2012/feb/19/greece-bailout-talks-papademos-brussels
Sheer lunacy indeed.
But please tell me if Tyler’s concerns are … well what are they? Is it really as bad as he says?
This is more than just about Greece. This is all of Europe. Or at least that’s my read on it. So is it true?
The Germans are strangling Greece even though they’re slowing their own economy to a crawl by doing so, all because of race hatred fanned by bullshit about “lazy Greeks”.
I personally do not know. I do know this that the whole charade up till this point was to save German, French and their monied backers rear ends.
How exactly this plays into the ECB’s latest moves is unclear. If I read it correctly, it means that ECB says what your debt is. Good…bad…or otherwise. Maybe a counter offensive to the ratings agencies.
I find the who thing rather crazy myself. Especially the part in my quoted text about Greece having to have papar currency all ready to hand out.
Paper currency is simply a convenience now for those things that using plastic for is not realistic. And the “black market” of course.
All other transaction are electronic. It’s how one would reevaluate the drachma once Greece did leave the Euro. That maybe part of it also.
Digging into it and linked to this diary in emails sent to some who may shed more clarity.
You may be reading more into it than the points made by Durden BUT, it might also be a step taken -w/o “collective action clause” but known of by the 17 governments- to minimize a ‘disorderly default’ by Greece.
It ‘should’ cause ‘consternation’ in the markets if Durden has the game correctly analysed.
BBG: Greek government said to prepare collective action clause lawhttp://www.forexlive.com/blog/2012/02/17/bbg-greek-government-said-to-prepare-collective-action-clause-law/ as of February 17, 2012 at 17:33 GMT
Think this may be the key: “European sovereign bond indentures now are worth no more than the paper on which they are printed.” BOnd sell off by those holding such bonds and failure to issue debt needed puts all of Europe -including Germany- in the same boat as the PIGS.
LOL…Out of the mouths of……That’s it..spill the beans.
“Alice! She’s a BLABBERMOUTH, Alice! A BLAAABBERMOOOUUUTH!”
> If [private] investors leave “en masse”, doesn’t [that] signal
> serious problems for Europe in general? Wouldn’t this loss of
> investing capital, if they actually did leave, plunge most of
> Europe into a serious economic crisis?
Not necessarily. Private holders of existing bonds would lose some interest profit, but all emu nations would again be fiscally solvent?
If all goes as described here, doesn’t this just mean that the ECB is finally acting temporarily as a de facto EMU-zone Treasury? If all private buyers of Euro-state bonds either pull out or are forced out, it just leaves the ECB free to transition all euro-using states to common euro-bonds, in unlimited quantities? Would that just leave the ECB free to act like the US Fed, with Treasury bonds forcefully “sold” after the fact to whichever “Primary Dealer” banks are required to drain ECB banking reserves?
All the Euro zone would have to do after that is get around to formalizing an EMU or EEU Treasury separated from the ECB. They might do that by expanding the staff & mission of the EFSF?
None of this gives any clue as to future EEU fiscal policy. Regional “austerity-struggles” might well ensue. The moment of political lobbying power would just further concentrate at the Euro Parliament, instead of being as distributed as it currently is across all member state capitals.
Didn’t Poland recently say they’d welcome the chance to give up their sovereignty, if they could permanently join a united Europe, and no longer be caught between Europe & Russia?
They’re all Germans now?
Not sure if that would actually be good for Europe. Monocultures constrain rather than foster innovation.
thanks for the link.
Zerohedge is a valuable site, so I don’t want this comment to seem critical of them, they present a lot of great info. I do notice that Tyler will sometimes get hysterical if getting hysterical might help the price of gold.
that being said, my take on what’s going on is the ECB is saying “look, we’re the last ones into this deal of buying Greek bonds, unlike all you banksters and hedge funds who were buying this stuff on speculation. We’re buying this stuff to prevent a collapse, we’re the fire truck showing up when the building is already burning, and we want our bailout funds to be first in line to be repaid in full.” It’s not that out of the ordinary, it’s kind of like any bank showing up late to the deal. Also, keep in mind that the ECB is the entity that buys all of these bankrupt countries’ bonds now, by printing money, so they are simultaneously bidding up the prices of all the sovereign bonds just by being the major ongoing buyer of the bonds.
And the ECB of course is the key entity in the whole mess, in that they are the only ones who can produce money endlessly, which is a fairly valuable entity when you consider the big problem in Europe is a lack of money to buy debt. The push back comes from Germany who is the only semi-solvent player.
So the ECB buys and buys and prints and prints, that will drive the value of the Euro down. The big question is what will go up as the Euro goes down, over time ? The dollar ? Gold ? Commodities, oil ? stocks ? treasuries, for safety ? If you can figure that out, let me know.
Interesting.
There’s a lot of ifs in there, but interesting. Hard to wrap ones head around the whole insane thing.
I don’t think Poland would say that. But honestly don’t know. I wonder what the Polish people would think about it.
reply to roger.
This might help putting thing in perspective: How Greece Could Take Down Wall Street, by Ellen Brown, over at commondreams, today. Not sure if this works, but it’s close: http://www.commondreams.org/view/2012/02/20
It’s funny to see the ptw (powers that were) on the receiving end of what they were dishing out. They are less than nothing now. China and allies are calling the tune, The Mandate of Heaven!
It says right at the beginning that it is a guest post by Mark Grant.
Hey Tamber,
Please forgive my participation even after you solicited only economists. I only possess useful skills and common sense.
You want 100% certainty? Here’s some. What cannot be paid will not be paid.
ECB taking total control? Yes that is correct, so? The actions of the PTB have just become shameless and practiced in the light of day now is the only difference.
Greece will default. The private bondholders will now at a minimum be subject to a 70% discount……that will continue to be called a 50% discount……which will in the end be a 100% discount which will magically fail to trigger the CDSs they purchased thus being defrauded blatantly yet again in the light of day.
The greek economy is presently contracting at a rate north of 7% per annum and gaining speed. That is more than 1/2% per month with no end in sight and new austerity programs yet to be implemented.
As has always been true……none of this folderol can be defined or addressed successfully as a liquidity crisis. That is why it never seems to end. It is a solvency crisis. The PTB are propping up a house of cards for as long as is possible to preserve their priviledge for even just a bit longer. They are willing to pursue this path regardless of the number of national economies irretrievably destroyed or even irrespective of the number of us serfs who lose their lives. God doesn’t have enough money to fill the blackhole these greedy bastards have built.
Greece is simply the first to fall, and Greece is going to burn to the ground.
You nailed it Robert. Give this man a cigar!
This whole thing reminds me an episode of Tails From The Darkside – A Case of the Stubborns.
Where the banks refuse to admit they are dead and insist on walking around stinking up the place and attracting flies.
Jamie Damon himself resembling the lead character.
hi tamber you might want to check this out. I put a link to it on david’s post. i can tell you i have been following the slog for years. his sources are real good. we are in the end game via greece and TPTB are desperate to stop this story getting out before they are ready.
http://hat4uk.wordpress.com/2012/02/19/greek-d-day-slog-us-source-confirms-wall-st-plans-as-secret-berlin-timetable-emerges/
Damn…wish there was a way to blow their (Germany, Wall Street, ECB) cover.
Thanks for the link bb.
I’ve been asking/explaining for months now, all over these boards, that the issue at hand has more to do with the risks associated with the CDS market than with the actual sovereign debt of nations.
That fact was obvious because the exposure on the part of the worlds banks, to Greek debt was no where near large enought to explain the level of hysteria surrounding the situation.
Just like the dark matter that astro-physicists know exists because of the effects it has on the universe, it could be reasoned that there was something very large, and very dangerous that had all these big banks scared shitless about the possibility of a Greek default.
Now someone finally prints a straight forward explanation.
And here’s the revelation;
Those who sold you the CDS, have the power to re-define the circumstances under which they pay off.
The casino metaphor we’ve all been using to describe Wall $treet breaks down at that point because as far as I know, no Las Vegas casino has ever told it’s customers that ‘because it’s a Tuesday in February, the house won’t pay ’21′.
As I recall when a country defaults, no one gets paid – and all the great clauses in those bonds will not get you a dime.
Indeed Germany’s defaults of its WW1 payments are example number one.
Hard to see what zerohedge is seeing beyond “senior” debt after the fact of prior debt is unfair, and that CDS payout is uncertain.
thank you for the link.
appreciate the education.
peace.
“God doesn’t have enough money to fill the blackhole these greedy bastards have built.”
That should be a bumper sticker.
Comments from all are welcome. I will take the education anyway I can. All is appreciated.
But this Tyler piece bothers me. It’s his alarmist tones.
Will they trigger CDS?
No one gets paid? Are you sure?
This is what I don’t understand.
There’s so much going on I’m not sure which version of the “sky is falling” is accurate.
“The Slog received confirmation from a New York based banking source that – whatever German Chancellor Angela Merkel’s public stance may be – plans have been firmed up on both sides of the Atlantic for “an inevitable Greek default some time in the third week of March 2012″.”
Third week of March? We shall see.
So the shite hits the fan in March. Whole month between now and then. What madness will happen between now and then.
Thanks for the link.
“Hard to see what zerohedge is seeing beyond “senior” debt after the fact of prior debt is unfair, and that CDS payout is uncertain.”
You remind me more and more of Thomas Friedman every day.
I would posit that those who’ve sold CDSs (TBTF banks) related to Greek default have been shitting their pants in fear of the prospect of default and the subsequent demand for payment of those contracts (bets).
Their embarrassment at wearing shit-stained pants has somewhat immunized them to the further shame related to their apparent willingness to refuse to pay off when that default actually occurs.
So the investors that bought CDSs to hedge their investment in Greek debt, and those clever folks who purchased the same sort of CDSs (only naked) in order to make money off the possibility of a Greek default are both going to be in deep doo-doo when the default happens and they are refused payment.
The CDS ‘market’ is a cesspool, those who sell them do not have cash reserves sufficient to cover the payoffs, and never did, and I suspect that most of those purchasing them do not have exposure to the underlying investments, but are merely vultures hoping to enrich themselves on another’s misery.
The crooks at the top of the food chain now say they can re-define the terms under which they are liable to pay the CDS holder, which I take as an admission that they do not intend to pay.
Of course they’ll never admit that because there is no way they could ever pay, that they never intended to pay. They’ll insist that they sold the CDSs in good faith but they could have never foreseen…blah, blah, blah. (remember the ‘sophisticated’ investor thingy)
If/when Greece defaults, I see the whole house of cards falling in chaos, and courts clogged with plaintiffs arguing over who deserves to be paid and by whom.
That’s when we find out for sure that the TBTF banks are insolvent, and that’s what all the panic is about.