Wednesday, April 28, 2010

Is Greece the "Surprise" that Breaks the Camel's Back?

As people move through a financial crisis, the hope is that future ‘surprises’ will be avoided. In making things better and getting the system operating once again, efforts are made to identify problems and then set out to resolve the problems. Problems are not solved over night, but being aware of the problems and then honestly working them out is the way to put things right.

The fear is the unknown...a surprise!

Last Thursday the financial markets got a surprise. Greece’s budget deficit was worse than had previously been reported.

Was this incompetence or lying?

That is not the matter now, the fact is that Greece’s budget deficit is worse than had been expected.

The market sold off and the Wall Street Journal reported in “Traders Bet On a Default From Greece” ( the following:

“Greek bond prices posted a drastic decline Thursday as traders began betting a debt default is inevitable, even if the country receives a massive bailout.

The Greek bond market is now priced for a "catastrophic event," says Sebastien Galy, senior foreign-exchange strategist at BNP Paribas.

Greece's woes helped sink the euro to an 11-month low before the common currency recovered some of its losses.”

Thursday, Moody's Investors Service downgraded Greece's debt rating and warned that additional cuts could be on the way. Tuesday, Standard & Poor’s lowered their rating of Greek debt to “Junk” and at the same time reduced the rating on Portugal’s bonds two levels.

The question plaguing the financial markets now has to be the reality of the ratings on other sovereign debt. This always happens when the market gets a shock! If the figures on the deficit of Greece were wrong, what about Portugal? What about Spain? What about Italy? What about Great Britain? What about the United States?

How far this uncertainty travels depends upon the time and the state of the market. European stock markets sold off yesterday. The Dow-Jones index closed down by 213 points. The Dow stock futures had been down by 30 to 60 points. Markets hate uncertainty!

How can we make the world more transparent?

Eventually the numbers all come out. As Warren Buffet has said, once the tide goes out one discovers who is not wearing a bathing suit.

And, this is an argument for short selling and Credit Default Swaps! Yes, those that cut corners and those that cheat and those that don’t reveal the full extent of budget deficits hate short sellers and the CDS. They hate them because they reveal that the “Emperor is not wearing any clothes” let alone a bathing suit.

The response? Point the finger at the “other guy”, the greedy trader! Divert attention! It is people like those “greedy traders” that give capitalism a bad name! Ban short selling! Eliminate Credit Default Swaps! Those greedy bastards!

Well, the surprise is out! Now we have to see how far the contagion spreads.

The press is having a ball with the title, the PIIGS!

Portugal, Italy, Ireland, Greece, and Spain ate from the trough till they were fat and happy and then they were too bloated to deal with the consequences. So the focus is on them.

This is great for the United States because we now get another “run to quality” boost. Monday, we saw the headline in the Wall Street Journal, “All Signs Point to a Costly Auction”: ( The lead statement: “The U.S. Treasury market faces a challenging week, as investors deal with hefty debt auctions, the uncertainty of a Federal Reserve meeting and key economic data that will likely show the economy continued to grow in the first quarter.

That combination likely means the government may have to pay to sell the $129 billion securities.”

This morning we read in “European Jitters Give Two-Year Auction a Boost” (

“Treasury prices rose Tuesday as investors sought safety in low-risk securities after S&P cut its ratings on Portugal and Greece, sending Greek sovereign debt to ‘junk.’

The reach for safer securities helped to buoy the $44 billion two-year auction, which attracted good demand and helped keep Treasury prices higher.

The auction, the first of several note sales this week, was more than three times oversubscribed.”

The Euro has dropped below $1.32, a level it had not been at since April 28, 2009.

Unfortunately for Goldman Sachs this news is not yet eclipsing the headlines that it is receiving concerning the government’s case against them. But, at least, there is another “finance” story on the front pages of the major newspapers. Good for Goldman, bad for finance!

Still, the issue is about disclosure, transparency, and openness. There are many in finance who do not like “day light”! If anything comes out of the efforts to reform the financial system it should relate to disclosure. If people want to be in the ‘ballgame’ they must fully disclose. If they don’t want to disclose, then they must be excluded and pay the penalty.

And, full disclosure includes “mark-to-market” requirements. People who place bets by mis-matching maturities must also “fess-up.”

Anyway, we have been surprised! Now, the system must re-evaluate everyone so as to identify any other surprises that might exist. In the process, everyone else pays!