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Friday, 24 February 2012

"Voluntary" Greek bond haircut was compulsory

The "voluntary" haircut which private Greek bondholders "agreed" to was “as voluntary as a confession to the Spanish Inquisition”, according to the Financial Times report of comments by the chief executive of Commerzbank.  The reporting of this by the UK based Financial Times might mark the beginning of the unravelling of "the spin" on the Greek issue.

The Financial Times report is significant because it appears to be the first time that a UK based press has broken ranks with the US to report that everything might not be resolved.  The western press has been driven into overload to "spin" positive market sentiment in an effort to construct economic confidence.  It has been rare so far for a UK based press to acknowledge disagreements between private and governmental Greek debt holders, to acknowledge that German banking interests might have a legitimate grievance, and to break ranks with the US press.  It will be interesting to see whether the US press divulges private bondholder upset to their audiences.

The Commerzbank's executive's comments raise critical questions about the reliability of credit default swaps (CDSs) to perform their insurance obligations to cover Greek sovereign debt default.  Because at least five financial institutions have speculatively sold insurance far more than existing debt, and far more than they can afford to honour, they can not permit Greek default, and seem now to have global governmental and IMF backing to prevent Greek default, even though Greece is unable to properly repay Greek debt.

That's why the G20 has deemed them "too big to fail", and implicitly assured them unconditional backing.

The threat to global financial stability has been reduced to semantics:  if a compulsory "voluntary" haircut is deemed to be a default then CDSs will be exercised.  If those CDS obligations are to make good those losses, then major financial institutions will require massive financial support to prevent failure.  The current western political structure will ensure that those financial institutions receive that support at any cost.  That means that global quantitative easing would be ensured:  massive inflationary money printing.  And, there no longer exists any reason for those "too big to fail" government backed financiers to act prudently, which is why those who are too big to fail now write financial derivatives at an accelerating rate.  Systemic risk is now being amplified.

The wider populace can only be "spun" so much.  They now know.  The press now starts to acknowledge that growing awareness.

Finance at all levels rests upon trust.  Trust counterbalances risk.  That trust has been breached at the highest levels, and continues to be breached at the highest levels.

That's why mainland China, and some others, are irreversibly accumulating gold.

I acknowledge the Financial Times' article "German bank chief hits at Greek debt deal".

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