We're All Subordinated (the echo of we're all subprime).

Here it Italy, investors see a 6,0% (circa) yield on a 10 year BTP and think, "Not bad. We won't default because Europe won't permit that and we're all senior in the capital structure, it's a sovereign obligation." Study closely how the default in Greece unfolds and shortly after that, watch how the negotiations for more aid or a debt restructuring in Portugal begin.  The devil will truly be in the details.

The truth is that Greece's debt has been arbitrarily placed into different places in the "capital structure" of that country's sovereign obligations. If you bought Greek debt and you're not a public entity (read BCE), then when Greece restructures (read defaults), you must take your 65% haircut (only 65%?!) while the BCE and other public investors maintain their nominal maturity amount (probably). You've become subordinated even though you own the same contractual obligation.

The BCE and other public investors maintain that they've already done their part and taken their lumps trying to support GGB prices, buying in the open market at 70-80 cents on the Drachma (so to speak). Guess what other bonds the BCE "likes" to buy, Bonos, BTPs and Portugal's debt. So if /when things get ugly and it's time to go to the barber again (read get a haircut) because these sovereigns chose a "voluntary" restructuring then we'll all be subordinated again. Why? Just because. (I guess)

I understand that the "authorities" are trying to save the world, but when legality and contracts will no longer be applicable then we'll find ourselves on a dangerous slippery slope. The authorities will begin to explain to us that in the name of equality / fairness we must limit and sacrifice our rights, our freedom.  Not only will our bonds be subordinated but also, ultimately, our liberty will be subordinated to the whims of the plutocrats and the kleptocrats.

Sorry for the rant.

Is Anyone Thinking About Japan?

I don't want to bore you with the numbers, but Japan's public debt situation is uglier than Greece's and Japan is a lot more important to the world economy than Greece (sorry).  Demographics advance like a glacier and their influence on an economy are just as unstoppable. Combining deteriorating demographics (Japan), deteriorating external accounts and an unsustainably high public debt load, and you get the preconditions for more...well, problems.

Let's keep our eyes on the East, Japan and China in particular, for clues to the next phase of the financial crisis. You can't continue to borrow when your debt carrying capacity no longer exists.

Insolvency Isn't Readily Observable...Until It Is

Overnight deposits at the BCE are at all time highs and the collateral posted at the BCE is of dubious quality at best. European banks are still under capitalized and are hoarding liquidity when what they need is more capital / less leverage. The CEE is further from, not closer to an agreement on a Fiscal Union, Greece is a walking corpse. Economic growth in the Eurozone is screeching to a halt, etc., etc.


Taken in isolation, these are interesting, if not worrisome data points. Combined in a complex evolving system these anecdotes could provide the catalyst and / or accerlant for a potentially very negative outcome (or not).  But maybe we should take Pascal's advice and stop worrying about the probabilities of the various outcomes and start focusing on the consequences of an improbable but very negative outcome.  Maybe it's time to weigh and not to count. It's a bit like the difference between capital (solvency) and liquidity.

Downgrade? What downgrade?

S & P on the European downgrade (read negative opinion) writes : "We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues." 


Translation : If you piss against the wind while walking uphill, you'll probably soil yourself while sliding backwards...and the surprise will be if you don't. 


Will 1 Old Euro = 1 Neuro? Only time will tell...