Courtesy of Karl Denninger, The Market Ticker
If you were wondering why the S&P dumped 20 points from the high to the low (on which it closed) today, here’s your reason:
The Greeks are demanding that the new bonds’ Net Present Value, — a measure of the current worth of their future cash flows — be cut to 25 percent, a second person said, a far harsher measure than a number in the high 40s the banks have in mind.
Yeah, well, what’s the alternative to Greece’s demands? Get nothing?
That’s entirely possible, by the way. And here’s the 900lb Gorilla in the room: It may not be legal under Greek law to give preferential treatment to the ECB.
This would of course put the lie to any claim that this swap was "voluntary" (not that it was in the first place) and thus destroy the ISDA’s "determination" (preliminary at this point) that such a transaction does not trigger the credit default swaps.
Nonetheless this is not an instant calamity as the actual credit default instruments outstanding are relatively minor in terms of numbers on a net basis.
The real problem is the precedent.
If you’re Italy, Portugal or (God forbid) Ireland why do you pay face value when the Greeks just shoved a 75% haircut down everyone’s throat?
I wouldn’t do it.
This is the domino problem, in short. One "tiny little nation" decides it’s had enough and…..
Of course this sort of "voluntary" exchange will effectively close Greek access to the bond markets for a period of time. Then again it’s idiotic for governments to use financing of this sort over the intermediate and longer term anyway, since it is never mathematically sustainable. Governments can successfully use such mechanisms for a short period of time to (for example) bridge financing requirements for a war, or in times of severe economic distress —provided they then pay off the debt when the war ends or prosperity returns. But when debt-based financing becomes a way of life and the balances grow "forever" you run into our old friend the exponent and eventually this destroys your national balance sheet — with certainty.
The "big lie" from the 2009 period of time is that we "avoided a Depression." We did no such thing — we covered it up but we did not avoid anything at all; we in fact made the situation much worse by adding more debt upon already crushing levels of debt!
Unless you’re interested in seeing credit markets lock up entirely — to the point that only self-liquidating trade credit remains available at any reasonable cost and immediate 75% cuts to both federal and state budgets become necessary we must accept the 40-50% cuts and/or tax increases — and the economic harm that will come from them in the short term.
We can mitigate many of these harms — but not all. We can force illegal immigrants from our nation, reserving the job opportunities that exist for our citizens. We can enact wage and environmental parity tariffs thereby making the employment of intentional pollution "over there" along with slave labor uneconomic, and if firms continue to do so instead of returning manufacturing here we then collect the tariffs with which to provide social services for those who would otherwise have jobs. We can put a cork in Bernanke’s BS "inflation" targets and demand under penalty of imprisonment that the FOMC perform to an actual zero inflation standard, thereby making it possible for the average person to "make it" in retirement with just a 7% saving of income on top of Social Security. We can get rid of the special-casing of student loan debt, thereby collapsing the "free money" college games and by doing so dramatically decrease the cost of education to where students can flip pizzas to pay for their school (as was entirely possible just 20 to 30 years ago.) We can stop the cost-shifting in medical care along with the "free money" mentality and by doing so make certain that basic medical care is affordable by nearly everyone, and for those who truly can’t afford it private charity will be sufficient to pick up that basic care need. And we can fix our tax system so that capital formation is not penalized while the current incentives for bad behavior are removed.
Or, we can pretend, like Europe has, that Greece is "fixed", that Italy is "contained", that Ireland’s fire is "out" and that Spain will not burst into conflagration.
And, if we take that latter course, we will soon be disabused of that notion with extraordinarily unpleasant and unavoidable consequences.
Pic credit: Banksy via Bruce Krasting
