Thursday, April 29, 2010

Greece Really Does Matter, Larry

Despite Larry Kudlow of CNBS being tired of hearing about Greece, he should listen up.  This is serious stuff for all of us - and his own country's debt-to-GDP ratio isn't too far behind the Euro basket-cases.  The most succinct explanation I've heard is that of A. J. Bernal, which I shall take the liberty to now paraphrase.  The issue is not losses to bondholders of Greek debt, but the likelihood that the investors who sold insurance on Greek debt to the market (ie. credit default swaps on those Greek bonds) probably immunized their long exposure to Greece with negative bets in other southern European economies.  If default takes place and the CDS's become operational then investors will force the cost of protection of other European countries into prohibitive territory as they are forced to further increase these short positions.  That increase will also dramatically increase the CDS spread in European banks, forcing them to take major accounting losses.  The German finance minister is right, Greece is very much the same as Lehman Brothers - just 10 times more dangerous.  Bernal argues that the moral hazard of bailing out Greece is minimal compared to the havoc a default would create.  The Balf just wonders when Wall Street will take responsibility for this global mess.