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Saturday, 10 December 2011

Germany's EU summit backdown raises many questions

Germany has submitted to US demands that sovereign debt holders be immune to "haircuts" if sovereign debt be restructured.  Private sector involvement in debt restructuring is now officially over, according to "EU Summit Clarifies Fiscal Union...".  Haircut risk has been transferred away from sovereign debt holders, banks, and bond insurers.

At first blush, this raises many questions.
  • What does this really mean?
  • Does this not interfere with normal bond market operation?
  • Why exactly would Germany agree to insulate bondholders, who knowingly and willingly took that risk, for potential income?
  • To whom, exactly, has the "haircut" risk been transferred?
  • Who will benefit if credit default swap (CDS) prices fall?
  • Is "haircut" immunity intended to protect banks who have overleveraged re-hypothecated clients' funds?
  • And to protect overexposed CDS issuers who've sold insurance to clients who don't even own bonds, making imprudently large "bets" that there would be no sovereign defaults?
  • Are US financial insurers still selling CDS insurance over Greek and Italian sovereign debt, to those who don't even own that debt?
Immunity against a "haircut" would only be if debt were restructured.  There appears to be no immunity against actual sovereign debt default.  Germany is obliged to prevent European money printing to avoid another Weimar republic, hyperinflation, social instability, political extremes, and war.
  • What would happen if a large European nation is unable to meet its sovereign debt obligations, worth more than the combined resources of the IMF, European Financial Stability Facility (EFSF), European Stability Mechanism (ESM) and European Central Bank (ECB)?
  • Is Euro money printing inevitable, to protect debt holders at any cost?
  • Can Europe refuse US exhortations to print money?
  • Can the US print money to purchase European sovereign debt to protect US banks and debt insurers?
  • Does this let financially irresponsible nations off the hook?
  • Does this let financially irresponsible banks and bond insurers off the hook?
  • Can the ECB's remit to control the European money supply, and to prevent European inflation, be undermined by the US?
I encourage discussion about the implications of this, in order to all share a wider understanding of these unprecedentedly abnormal financial and economic times;  to understand how our world has fundamentally and permanently changed.

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