Tag Archives: Spain

LOTS OF FROTH, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

A brand new development in the history of the ECB has occurred: leaks yesterday revealed the broad outlines of its new sovereign debt securities’ purchase programme. One cannot help thinking that it was necessary to prepare the ground in advance, with the ECB decisions falling well short of some of the mounting speculation.

According to Mario Draghi, there will be no limit to the amount of bond purchases on the secondary market – but the scope of the announcement needs to be put into perspective. They will in fact be decided on a case by case basis, and not as soon as a specific threshold has been crossed: based on interest rates or spread for example. It has also been confirmed that it will concern securities with a maturity of between one and three years, something already anticipated recently by the market, judging by the result of the issues which have occurred.

Continue reading LOTS OF FROTH, by François Leclerc

SURRENDER, YOU ARE SURROUNDED!, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

It is not just Italy and Spain causing problems, after the decisions taken during the last summit suffered a setback, in view of the spectacle of great confusion and nervousness we have witnessed with regard to the joint press release – which wasn’t one – from Spain, Italy and France demanding immediate implementation. Simultaneously, Greece is providing an example of the strategic retreat of the European authorities and of the IMF.

It is now the ECB and the Eurosystem which hold the vast majority of the Greek debt, a fact which has allowed the commercial banks to consider the countdown which has already begun with a far greater degree of equanimity. The same cannot be said for the European authorities.

Continue reading SURRENDER, YOU ARE SURROUNDED!, by François Leclerc

SPAIN : THE MARKETS ARE EXPECTING NEW DEVELOPMENTS SOON

Translated from the French by Tim Gupwell

Exceeding 6% on 10 year debt is already dangerous. According to the terms of the balanced budget rule, this signifies that a nation will require growth of around the same amount, whereas in fact Spain has registered a negative growth since the beginning of the year! So, 7.567% at 10.15  this morning! As the German 10 year Bund stands at 1.255%, this means that for Spain over 10 years there is a risk premium (for the possibility of the debt not being repaid) which can be reckoned at 6.312%.

© Bloomberg

Welcome to a world of mistrust! Moreover, when the risk premiums in rates for shorter term maturities reach, or even exceed, those maturing at later dates, it signifies that the capital markets presume that something is going to happen soon, and something not very pleasant. This morning the rate for 5 year Spanish debt is rivaling the rate for 10 year debt: 7.543% at 10.16. The 5 year German rate stands at 0.334% ; which means that in this case the risk premium for Spain is 7.209%. Translation: the danger over five years is considered as being greater than over ten. In other words, according to the capital markets, there will soon be new developments.

© Bloomberg

QUIET ON THE SET, AND… INACTION!, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

Events are moving fast. We were expecting it of Greece, but Spain is overtaking it. Yesterday evening, a human tidal wave invaded Spanish town streets, which these days have become virtually permanent places of mini-demonstrations at midday or after work. Today, at the very moment when the Eurogroup ministers were adopting the bail-out plan for the Spanish banks, the bond rate had edged up to 7.20% and the Madrid Stock Market plunged more than 5%. Instead of falling as had been predicted, the government has announced that the official unemployment rate is going to reach 24.6% by the end of 2012. A bona fide rescue package will soon be required, something the Bundesbank and the Members of the Bundestag have been advocating, seeing an opportunity to carry out yet another brilliant demonstration, associated with another round of austerity measures. Time will tell soon tell us which one will be first.  

Italy is likely to be the next domino to fall. Major stock values fell by around 5% on the Milan stock market, since the Italian banks are saturated with debt securities whose value is gradually falling as bond rates increase in line with Spain’s. The Spanish scenario is repeating itself due to the increasingly interconnected links between public and private debt which have developed over recent months. Italy may not have the colossal property bubble, but it has a public debt situation that is just as bad.

Continue reading QUIET ON THE SET, AND… INACTION!, by François Leclerc

FIRST IT WAS THE AGENCIES, NOW ITS THE FORECASTERS’ FAULT, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

“I can’t see any time soon when…the pressure will be off” replied David Cameron, the British Prime-Minister, in an interview with The Daily Telegraph. He continued, “this is a period for all countries, not just in Europe but I think you will see it in America too, where we have to deal with our deficits and we have to have sustainable debts”. In conclusion, his austerity policies are likely to continue beyond 2020, as the situation is “a lot tougher than the forecasters were expecting”. Georges Osborne, the Chancellor of the Exchequer, has already extended to 2017 the austerity plan of 2010, which was initially intended to last five years.

The prolongation of the schedule which is taking shape is now being referred to, in veiled terms, within the Eurozone, a good example being Jérôme Cahuzac, the French Budget Minister, when he announced that “ I’m afraid that reducing the debt may take a little longer” in reply to a journalist who was talking of one, two or three years.

In its annual report, the IMF has just outlined a road map for the Eurozone, advocating – when it actually makes any concrete proposals – measures which focus on pooling the debt, an issue which radically divides politicians. The continuing crisis, it now says, is raising questions about the viability of the monetary union because “its root causes remain unaddressed” and “the adverse links between sovereigns, banks, and the real economy are stronger than ever”.

Continue reading FIRST IT WAS THE AGENCIES, NOW ITS THE FORECASTERS’ FAULT, by François Leclerc

THE RESULT OF UNRAVELLING A BALL OF WOOL… FROM THE WRONG END, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

François Hollande has confirmed that the Government is going to propose for adoption an organic law (which a simple law cannot undo) in order to have the balanced budget rule adopted, on the advantageous pretext that it is provisional. There have been many occasions in recent French history when special measures have been adopted for their presumed importance, without ever leaving good memories behind.

At the same time, the debate in Europe continues to move on, focusing once again on the reduction of the banks’ debts. Thanks to the Wall Street Journal, we have learnt that during their latest meeting, the ECB advised the European Finance Ministers to force the senior debt-holders to participate in the bail-out of the Spanish banks. A 180° U-turn which was not actually followed, since the draft of the memorandum which is supposed to be adopted during the next Eurogroup meeting on the 20th July makes no mention of it.

According to the newspaper’s sources, the ministers did not wish to follow Mario Draghi’s proposals at the meeting, as they were afraid of how the markets would react. It was also out of fear that the Irish government would demand equal treatment, since to save the European banks – in particular the British ones – the Irish Government had to borrow money to pay off the senior creditors of their country’s banks. Nor would the Greek and Portuguese Governments have failed to jump on the bandwagon.

Continue reading THE RESULT OF UNRAVELLING A BALL OF WOOL… FROM THE WRONG END, by François Leclerc

WELL SPOTTED, BRAVO!, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

As already highlighted the Spanish government is already benefitting from a de facto rescue plan under another name. To save appearances, the new austerity measures put forward for vote in parliament have not been the object of a memorandum jointly signed with those providing the funds, as had previously been the case for other countries. In fact, the announcement of these measures came the day before that of the banking bail-out!

One major difference with the preceding rescue plans can be observed: the entirety of the 100 billion Euros loans provided – whose planned repayment schedule is staggered until June 2013 – is destined for the banks. The State will merely pass on the funds, something which has not prevented the Government from imposing austerity measures on the Spanish, even though the two things are not strictly connected.

Continue reading WELL SPOTTED, BRAVO!, by François Leclerc

WHEN WE’RE NOT MOVING FORWARDS WE’RE GOING BACKWARDS…, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

The European Finance Ministers managed during the course of the night to finalize a minimal agreement, which needs, as usual, to be examined in detail due to its grey areas. They put together a set of nominations to the ECB and the ESM based upon the provisional re-appointment of Jean-Claude Juncker at its head, in the absence of any other solution. Then they reached a “tentative agreement” (another way of saying a broad outline) with regard to the particular case of Spain which needs to be wrapped up for adoption on the 20th July.

An additional year will be given to Spain to reduce its deficit and get back on track, which confirms that things are in the process of getting out of hand, and which depends on the new austerity measures that Mariano Rajoy is going to announce this week. These are said to include an increase in VAT, reduced social security payments, reductions in unemployment benefits and a revision of the methods used to calculate retirement benefits. A preview of the program has already been presented by the Spanish Finance Minister, Luis de Guindos.

Continue reading WHEN WE’RE NOT MOVING FORWARDS WE’RE GOING BACKWARDS…, by François Leclerc

GUILTY PARTIES WANTED !, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

In accordance with the predictable script, the bond market is under pressure again. The cost of servicing Spanish and Italian debt has continued to increase as their financing plans move forward in little measured steps. The effect of all this is to place an additional burden on the budgets, undermining those measures which are intended to reduce the deficits.

The statistical institutes INSEE (France), IFO (Germany) and ISTAT (Italy) all agree: Europe is sinking into a recession which they describe as ‘technical” in an attempt to make it sound innocuous, but which, regardless of what they call it, amounts to the same thing. This is why the ECB has, unsurprisingly, just decided to cut its main interest rate.

It explained that it was trying once more to encourage banks to develop credit in a bid to restart the economy. With the markets having anticipated the move, there is no guarantee of success. Success is assured, on the other hand, for the Eurosystem in its role of bad bank, the central bank having once more lowering the bar for the collateral guarantees it will accept from banks in return for this operation. Once again, the hidden purpose is to ease the pressure on the banks.

Continue reading GUILTY PARTIES WANTED !, by François Leclerc

AFTER THE WORDS, THE MAGIC FORMULA…, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

What can you say when you are in total disagreement? You can always assert, with one voice, the need for a union! This is this perspective that the quartet composed of José Manuel Barroso, Mario Draghi, Jean-Claude Juncker and Herman Van Rompuy (in alphabetical order) continues to work on.

A new magic word has been discovered and is going to be proclaimed with all its variations, to push for the implementation of four unions: banking, fiscal, economic and political. With the fiscal union already in the pipeline, the next stage which urgently needs to be reached is that of the banking union. According to a leaked document, it is supposed to be ready in a year – reverting back to a new season of this tactic of putting out feelers to see how people react.

Continue reading AFTER THE WORDS, THE MAGIC FORMULA…, by François Leclerc

TREASURE HUNT, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

Following the clues for the next bail-out of the Spanish banks is proving to be a veritable treasure hunt. To participate, follow the guide!

Initially, the EFSF (European Financial Stability Facility) is going to borrow funds on the markets, using the member states guarantees, in order to lend them to the Spanish Government, which will subsequently lend them to the banks for the bail-out. The result of this haywire approach will be a transfer of debt from the private sector into the public sector.

But in the meantime the banks have subscribed to public bond issues from the Spanish state, destined to finance its debt, using funds lent to them by the ECB to enable them to do so. To make such an operation possible, the Central Bank will lower their requirements regarding the quality of the assets put up as collateral by the banks. Bearing in mind the differential in the rates, it will be a profitable operation for the banks since they will end up lending at higher rates than they borrow at.

What conclusions can be drawn from all this at the end of the day?

1 – The ECB is playing the role of bad bank, which the Spanish government didn’t create, by taking on all the toxic mortgage-related assets.

2 – The bailing-out of the banks is increasing the public debt, which the State was already struggling to reduce.

3 – The rescued banks have been further endangered since they now hold even more of this debt, which may need restructuring in the near future

If the logic behind these measures is jumping out at you and you have found the treasure at the end of the hunt, then you could be the ideal candidate to apply for a post at the Euro Working Group, the organism of bureaucrats who prepare the meetings of the Eurozone financial ministers. If not, maybe you could envisage starting up in the near future on a blog hosting a column about the European debt crisis.

SPAIN: BOND MARKET THIS THURSDAY 21St JUNE

Spain managed to borrow 2.22 billion Euros this morning. It was hoping to raise 7.7 billion. The Wall Street Journal pointed out that this was “thanks to demand seen overwhelmingly coming from domestic banks”.

The coupon obtained by lenders for 2 years was 4.706% (compared with 2.069% on the 1st March); over 3 years it was 5.547% (compared to 4.876% on the 17th May) and over 5 years it was 6.072% (compared to 4.960% on the 3rd May).

 

THE SPANISH RISK PREMIUM

The Spanish risk premium

There were two bond issues today, one in Spain, the other in Denmark, which allow us to carry out an interesting little calculation of the risk premium required of Spain when it borrows on the capital markets.

A short while ago the Spanish Treasury department issued more than 3 billion Euros of debt for 12- 18 month securities.

Because we must always look on the bright side of life, it was pointed out that for an offer of only 3 billion there was a demand up to 8 billion – which is always nice to know, but not of tremendous interest since what is really important today (in the context of yields exceeding 7% for 10 year Spanish debt) is the coupon demanded by potential lenders in order for them to do without their capital for a year, or a year and a half. And in this respect, the situation is a lot less rosy: Spain has had to agree to 5.074% for a year and 5.107% for 18 months. It’s very steep, and not only if you compare it, for example, with what the capital markets are asking of Germany at the moment, but also with regard to what this very same Spain was being asked for only a little more than a month ago. On the 14th May, to be exact, Spain was borrowing over one year at 2.985% and for 18 months at 3.302%.

An increase in the risk premium, therefore, over one month and 5 days, for a one year Spanish bond (by 2.089%) and for an 18 month bond (by 1.805%). That’s steep enough in itself. It bodes very badly for what is likely to happen on Thursday, when Spain will attempt to issue two, three and five year debts for a total of 2 to 3 billion Euros. The potential demand will be (I can already guarantee it) around 5 billion Euros, which will be presented as a positive piece of news (that too I can guarantee), but what will be really interesting to know, is at what rate, including with what risk premium, the capital markets, in their magnanimity, will be prepared to lend to Spain?

Now to dishearten the Spaniards a little more: the Danish have also issued debt today, two year debt, for a lower amount, of course, of 1.55 Billion Crowns, something in the order of 208 million Euros. What coupon did the lenders get as compensation for their two years of deprivation? -0.08%. In case you missed it, I’ll repeat that in words: minus zero point zero eight per cent.

In order to lend over two years without risk (that’s what lending to Denmark amounts to at the moment), the capital markets are prepared, at the current time, to pay out of their own pockets. That speaks volumes, my friends, of the confidence there is in the Eurozone!

Ok, just to finish off, here is the little calculation as promised. If the rate without risk today for two year debt is at 0.08%, the risk premium over one year is (as a minimum, because it’s over a shorter period of time) 5.074% + 0.08% = 5.154%, and for 18 months (at least) 5.07% + 0.08% = 5.187%.

Have a nice day all the same!

 

Le Vif/L’Express, « There is ALWAYS an alternative », June 22, 2012

This is an exclusive preview – in English! – of my column which will be published in the Belgian weekly Le Vif/L’Express this coming Thursday

The phenomenon is the way in which things manifest themselves to us, and this can be real – either with things appearing as they really are; or it can be deceptive – with things appearing other than they really are – such is the case for optical illusions for example which suggest a false reality. Where the Greek language said phainomenon, latin said apparentia, appearance, with the same two nuances as for phenomenon – either an appearance faithful to the nature of things, or, on the other hand, an appearance which is deceptive.

Why this talk about epistemology? Because of the Greek elections last Sunday, and the European political class which has fallen victim to an appearance which is deceptive: it thought that encouraging the Greeks to vote for the right-wing party New Democracy was a way of saving the Euro, fearing that a vote for the left-wing coalition Syriza, would signal the end of it. Whereas in fact the opposite is true

Why? Because the formula adopted so far to try to save the Eurozone has been a spectacular failure. To persist stubbornly with the same policy following the principle of ‘TINA’ (There is no alternative, the infamous words of Margaret Thatcher), is to be sure of pursuing the hellish spiral descent which was triggered at the end of 2009. The Europeans who are roped together like a climbing team (let’s not pull the wool over our eyes) are in spiritual turmoil. The ropes of its members are working loose one by one: Greece, Ireland, Portugal, Cyprus…. whilst the number of them looking to have a secure foothold – burdened by the weight of those already dangling in mid-air which is growing heavier and heavier – is reducing dangerously.

Continue reading Le Vif/L’Express, « There is ALWAYS an alternative », June 22, 2012

FRANCE AND THE FUTURE OF EUROPE

France and the future of Europe

The fact that Spain seems to have lost all access to the capital markets for the foreseeable future, seeming thus, at first glance, to condemn the entire existence of the Eurozone, was headline news on Paul Jorion’s blog yesterday. Firstly, as discussed in the article ironically entitled “The Greeks have made the right choice”, where I drew attention to the fact that the victory of the right-wing party New Democracy in the elections didn’t seem to have any positive or negative effect on the international markets since the coupon for 10 year Spanish debt had shot past the 7% threshold in the morning (and was at 7.158% at the close). Then, I returned to the theme in the afternoon with “The loss of confidence in the Spanish markets – Live”

During all this time, what did the French press think of all this? Nothing it seems. Did they speak about it the following morning? Not really, not, in any event, in anything I had access to. In Les Échos on line ? Uh.. nothing. In the printed version ? Uh…..nothing. Le Monde on line? Uh….nothing. Le Figaro on line? Uh… nothing.  La Tribune (now only available on line)? Uh….nothing.

In Belgium, it made the headlines in l’Écho, which manages to save the honour of the French-speaking press. What about the English-speaking press? There, it’s different: they’re talking about nothing else! Front page news for the Financial Times online, first page of the online Wall Street Journal, front page on the site of the Bloomberg agency, etc.

The conclusion to be drawn from all this? (Unless I have looked really, really badly) no one in France is even the slightest bit interested in the future of the Euro.

A BIG BANG, OR NOTHING , by François Leclerc

Guest post. Translated from the French by Tim Gupwell

With the G20 meeting being held in Mexico at the start of the week, our perspective will find itself altered, falsely accustomed as we are to only seeing the debt crisis from a European angle. On the 18th and 19th June, the greats of this world are going to gather in Los Cabos, a tourist resort in Southern Lower California, under the double auspices of debt and global recovery.

To avoid standing idly by whilst confronted by a disaster of its own making, the British Government has just announced a plan to relaunch the economy with banking credit, funded by a Bank of England liquidity programme. In the context of an overall 80 billion programme, there are plans for monthly injections of around 5 billion Pounds (6.1 billion Euros). But the question that needs to be asked is whether the results will be as inconclusive as those obtained from the ECB’s massive injections, or indeed the tireless pursuit of zero-rate loans (from 0% to 0.1%) by the Bank of Japan – still without any further success – and whose 700 billion Euro acquisition programme of private and corporate securities is still in force.

The British Government wants to make these banking loans conditional on the latter making specific commitments, but hasn’t this been heard before? The monetary policy instruments of the Central Banks merely allow more time to be bought, and do not resolve any of the unanswered questions.

Continue reading A BIG BANG, OR NOTHING , by François Leclerc

AND NOW?

And now?

14 juin 2012 par Paul Jorion

And now? What are we going to do? Now that Spain has lost access to capital markets for its debt?

True, the downgrading yesterday evening of Spain’s rating by three notches by Moody’s, from an A3 to Baa3 has not helped matters. But after all, it hasn’t taught us anything that we didn’t already know last weekend: with a 10 year sovereign debt rate stuck around the level of 6.75% (*), the game was up anyway when it comes to financing its debt on the capital markets.

The cause of all this? The additional 100 billion euros obtained by Spain from the European funds, and for which the nation itself is directly liable, European regulations forbidding direct bail-outs from its institutions.

Have you noticed that the European regulations are packed with suicidal clauses, the implications of which we are still discovering today, in emergency situations? Some people, convinced of the unlimited power of the human will, will explain to you that this is deliberate: foreseen long ago for the setting in motion, one day, of the Great Secret Plan. A more down-to-earth explanation is that it is the result of human inventions which natural selection has not yet had the time to sort out.

But didn’t the Americans succeed, managing to found a great nation with lots of little bits?! True, but that is indeed the point: in that particular instance, the method of trial and error was used on a grand scale – the United States of today has had to endure a vicious civil war to clear things up somewhat. And some of the scars are still fresh.

Already, keeping the Greeks in the family is very hard. Add to that Portugal, plus Ireland, plus Cyprus (today, at the end of the morning). Nevertheless, Spain – and this was said from the start, right after the initial alert at the beginning of 2010 – is too big a morsel to swallow for the Euro zone to rest intact: it is just not possible. Not to mention Italy, also very pale, on a chair in the corridor of the clinic.

On the 5th April 2010– already two years ago! – I had explained it in an article for the Monde-Economie entitled “The red line”: “There will soon be national unity governments, when it becomes evident to everyone that no single party is able to get to grips with the irresolvable problems being posed; subsequently this will be followed by a Committee of Public Safety when it becomes clear that even working together they understand nothing; and – if God takes pity on us – this will be followed finally by a new National Resistance Council, at the moment when it will be necessary, beyond the differences considered irreconcilable today, to launch an ultimate attempt to save what can still be saved.”

M. Hollande has not yet reached this stage, convinced as he is, that if what France needs is growth, the Greek temperament is far better suited to aggressive austerity measures. What he wishes for the Greeks is for Pasok and New Democracy to come out victorious in the Greek elections. And he hasn’t hesitated to tell them. Without doubt, this would be a miniature reproduction of the ill-matched Franco-German couple which is currently offered to us. The winning formula seems, to him, to be that of the union of a right-wing Socialist party with a Liberal party, both of them convinced that mothballing the welfare state is a much more urgent priority than reining in the world of finance

It is to be noted that the Americans are in much the same state of mind. Yesterday, Jamie Dimon, the boss of J .P. Morgan Chase was being grilled by the Banking Committee of the American Senate. He was asked how his bank had managed, by inadvertence, to lose between 3 and 10 billion dollars. The Republican Party Senators used up all their allocated speaking time to maintain – wanting Mr. Dimon to confirm it enthusiastically – that at the moment the greatest worry is that of an over-regulation of the financial sector. This is how it is at certain periods, you can take my word for it: programmed suicide is to be found everywhere. And I am sparing you the most comical examples.

Finally, let’s wager that people in Brussels are working hard at the moment to find solutions, that further cunning plans are being concocted in order to be put into practice in 2014 or 2018. Why are these miracle solutions always being delayed, it would not be an exaggeration to say, indefinitely? All in good time. Except that today, on the 14th June 2012, this is what is missing the most – time that is.

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(*) 6.974% at 10:51

SPAIN IN STORMY WATERS

Spain in stormy waters

12 juin 2012 par Paul Jorion

The 10 year rate for Spanish debt has just reached a historic high. On the 25th November of last year, the rate had beaten a record when it reached 6.72%. Yesterday early in the morning, when the European markets were in ecstasy about the news of an 100 billion euro aid package for the Spanish banks via the Spanish state, the rate had dropped back down to 6.02%. It has just reached 6.809% (at 16:27 Paris time).

Of course the danger of this type of progression is that an increase in the rate generates a positive feedback loop: the rise reflects the impression that the credit risk is deteriorating (the risk of the debt not being reimbursed and of the non-payment of the interest promised), a deterioration which will lead to capital markets demanding the inclusion of a higher “risk premium” in the rate. But a higher rate will make it more difficult for the state to meet its debt commitments (reimbursing the sums borrowed and paying out the promised interest), which will increase the credit risk for its lenders….. which will in turn lead them to require the inclusion of a higher “risk premium” in the rate, etc..

There is a threshold beyond which this mutually reinforcing effect becomes irreversible. Unfortunately for Spain, it has just entered into these waters

HOW CREDIT DEFAULT SWAPS WILL HAVE DESTROYED THE EURO

How credit default swaps will have destroyed the Euro

12 juin 2012 par Paul Jorion

And what of the CDS (credit-default swap) speculators who don’t pay taxes? Why don’t we hear anything about them? We hear a lot about the Greeks not paying their taxes, and at the moment, due to the tactlessness of some, we hear a lot about international civil servants (more precisely those of the International Monetary Fund) who don’t pay taxes, but, in the case of CDS speculators who pay no taxes, goodness knows why – not a word!

It has to be said that it is not so simple to find out who they are exactly because they constitute part of the shadow banking sector. Which is what exactly? It is non-regulated finance. Why is it non-regulated? Because it is these people who pay the salaries of the lobbyists who draft up the financial regulation laws (and sometimes other laws too), which the elected representatives then receive ready-made, and which only require signing-off.

Being in the shadows therefore, we don’t really know who they are. Do they never explain who they are? Well yes, in a way: when a speculator speaks on his behalf, he always employs the same expression: “people acting with due care and diligence”. When a speculator explains what he does, he starts his phrase with “people acting with due care and diligence ….” For the remainder of this article I shall therefore designate the speculators as “people acting with due care and diligence”, and it will be clear who I am talking about.

When the Greek collapse was imminent, people talked a lot about the responsibility of the CDS for what was happening. Now with regard to Spain, not a word! Why have people stopped talking about credit default swaps? I don’t know, unless it is as in the Jacques Brel song “On n’oublie rien de rien, on s’habitue, c’est tout” (We don’t forget anything about anything, we just get used to it, that’s all”)

How will Credit Default Swaps destroy the Euro? I will explain. First of all, a reminder that a CDS can play the role of insurance for a debt.  Imagine you have lent 100 € to Oscar. As you are not sure of being paid back, you address yourself to Eusèbe who insures you. Every month you pay 5 € to Eusèbe, and in return for this premium, Eusèbe will pay you any money that is missing at the end. Oscar only gives you 75 € back? Eusèbe will give you the missing 25€. Oscar has vanished into thin air? Eusèbe will pay you, on the dot, the missing 100 €.

That’s what is called a ‘covered’ CDS position. Now let’s turn to the ‘naked’, uncovered positions. Pay close attention, this time it’s more complicated because there are now four people involved: there is also Jules and Gontran. Jules has lent 100 € to Gontran. I visit Eusèbe and I ask him to insure me against the possibility of Gontran not paying Jules back. Why would I do that? For goodness sake! Because I am a person acting with due care and diligence of course (I swear, some people ask the strangest questions!)

I won’t explain why it has become normal to call a ‘naked’ CDS position: “insuring the neighbour’s car”, I’m sure you have understood.

Naked CDS positions will be forbidden in Europe from the month of November. Why have we waited so long given that these naked CDS positions had already led to the collapse of Greece in January 2010? (Here we go again, people asking the strangest of questions!) Because there was still Spain, Italy and France…. to be sent to the scrap yard, then to be sold on in bits at attractive prices to those prudent (forward-thinking) ‘people acting with due care and diligence’ who had put some money aside.

How do these people acting with due care and diligence cause the collapse of a country? Once again, I’ll be brief: they insure the neighbour’s country. As they are (at the least) four times more numerous than those who insure their own country (and who have really something to lose), they inflate swell the demand, leading to a rise in prices.

Meanwhile the economists watching all this say to each other : “Goodness, look how the risk that Gontran doesn’t pay Jules back is increasing. Scary stuff!”

Do the economists not understand then that it is those people acting with due care and diligence who cause the prices to rise? No. In their economy manuals, speculation doesn’t exist: it is not explained. If it is, there is a little footnote which describes how “people acting with due care and diligence contribute liquidity to the market”. End of story.

The price of the CDS premiums increases, because demand increases. The economists calculate the risk that the country won’t repay its debt by effecting a calculation in the opposite sense: from the amount of the CDS premium.

The result is that the day when Gontran presents himself again, in order to lend to him the capital markets require a rate of interest into which they have inserted (it’s called the spread in the newspapers) the risk premium for the CDS market (those genuinely insured people acting with due care and diligence) and, hey presto, to borrow over 10 years, Gontran is asked to pay an interest rate of 28.9% ( as is the case for Greece at the moment according to Bloomberg) and it’s all over for Gontran: the troika is already knocking at his door explaining how to become a serf, and how it’s not too bad after all.

But wait, it’s not yet over: the funniest is yet to come! An insurer has to have reserve funds, doesn’t it? In that way, if something unforeseen happens, it can draw on its reserves. In the majority of cases, this will be enough and if it is not the problem is posed only for the difference between the sum to be paid and the reserves, which will, at least, have softened the blow. But in the case of the CDS (and here I see some of you laughing your heads off because you can see what is coming) the CDS are in the shadow banking sector! What would be the point of being in the shadow banking sector, if in this shadow banking sector, one were obliged to keep reserves as one would in the (idiotic) daylight sector?

So, no reserves to cushion the blow in case of a problem, and as there is -as I have said – (at least) four times more people acting with due care and diligence who have insured their neighbour’s country than those who are really running a risk………

And this is why, to cut a long story short, CDS will destroy the Euro (or at least, it, given that, from the way in which it started…..)

WHEN THE WISE MAN POINTS AT THE MOON… (I), by François Leclerc

Guest post. Translated from the French by Tim Gupwell.

The chaotic ups and downs of the deleveraging process continue inexorably, affecting not only the debt of the member states but also a European banking system which is now in the same mess. What it had been concealing has now been revealed: it is in a very sick and feeble state.

In order to subdue and contain this gradual process, new bail-out instruments have had to be put in place – which are the subject of much debate; their effectiveness is limited since they are part of a debt-reduction strategy which relies predominantly on the staggering of its financing with public funds that are more or less mutualised. What is new about all this is that, as the amount required increases, it is becoming increasingly difficult to raise the funds. This is prompting a consolidation of the private sector (in order to limit the damage and to share the costs), which is, in turn, destabilizing this sector as well.

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