Felix Salmon

Another RSS feed gets truncated

Felix Salmon
Apr 29, 2010 19:03 UTC

One of the things missing from the Great RSS Truncation Debate (see me, passim, ad nauseam) is much in the way of empirical data. So, in the wake of the WSJ’s recent decision to truncate its blogs’ RSS feeds, it’s going to be interesting to see what happens over at Above The Law. It’s truncating for the next month, and seeing what happens, against the sage advice of executive editor Matt Creamer.

Breaking Media’s CEO, Jonah Bloom, explains that it comes down to saving a bunch of his own time:

In our case, the move was prompted as much by my annoyance at the growing group of content thieves scraping our content via RSS (I dealt with two yesterday), as it was by a desire to get some commercial benefit from those readers. We’re a small company with limited resources, and I got fed up wasting valuable time trying to track down these parasites who aren’t only benefiting from our editors’ hard graft but also potentially messing with our search engine results by creating duplicates of our content on other sites.

On the other hand, notes Creamer, scrapers don’t need full RSS feeds to scrape content, and it’s becoming increasingly outmoded to think that the only way people should read online content is by pointing their computer’s web browser at a web page.

Most content providers get furious at the idea that anybody is stealing their work, and therefore waste valuable time trying to track down such parasites. I’m much more sanguine about scrapers: they exist, they get a tiny bit of search-engine traffic at the margin, but they make no visible dent in readership, and they never actually become popular in their own right. (Although I’d love to know the story behind the Ethiopian Review, a quite beautifully simple web-scraper which carries no ads, as far as I can tell; it’s the only scraper I’ve seen which people might actually want to come back to.) In general, I’m flattered by scrapers, just as I’m flattered by people who send my blog entries around by email. It’s all good in the long run.

In any event, I’m looking forward to Bloom reporting back in 29 days and telling us all what happened to both the number of scrapers and the quantity of web traffic after he truncated his feeds. The more datapoints we have on this, the better.

Update: dWj has a good idea in the comments:

I would think randomly truncating 10% of the entries would annoy scrapers a lot more than regular readers, at least relative to truncating 100% of them.

Has anybody tried this?

Update 2: This is funny. And, I see ads on it! (Via)


I’ve clicked through for some of the WSJ content, but certainly a lot that I would have read before I haven’t bothered with. This may still be a net gain from their standpoint, depending on what they’re trying to maximize here.

I would think randomly truncating 10% of the entries would annoy scrapers a lot more than regular readers, at least relative to truncating 100% of them. Maybe that’s not true.

Posted by dWj | Report as abusive

How the Greek crisis is the ECB’s fault

Felix Salmon
Apr 29, 2010 13:59 UTC

Peter Boone and Simon Johnson have a long and dense post on the eurocrisis today, which has a lot of different diagnoses and conclusions. I don’t agree with all of it, but I do think they touch on something important when they trace it all back to the way that the ECB became a quasi-fiscal agent:

The underlying problem is the rule for printing money: in the eurozone, any government can finance itself by issuing bonds directly (or indirectly) to commercial banks, and then having those banks “repo” them (i.e., borrow using these bonds as collateral) at the ECB in return for fresh euros. The commercial banks make a profit because the ECB charges them very little for those loans, while the governments get the money – and can thus finance larger budget deficits. The problem is that eventually that government has to pay back its debt or, more modestly, at least stabilize its public debt levels.

This same structure directly distorts the incentives of commercial banks: they have a backstop at the ECB, which is the “lender of last resort”; and the ECB and European Union (EU) put a great deal of pressure on each nation to bail out commercial banks in trouble. When a country joins the eurozone, its banks win access to a large amount of cheap financing, along with the expectation they will be bailed out when they make mistakes. This, in turn, enables the banks to greatly expand their balance sheets, ploughing into domestic real estate, overseas expansion, or crazy junk products issued by Goldman Sachs. Just think of Ireland and Spain, where the banks took on massive loans that are now sinking the country.

Given the eurozone provides easy access to cheap money, it is no wonder that many more nations want to join. No wonder also that it blew up.

The magnitude of the problem that Boone and Johnson describe here is of course directly related to the spread between the ECB repo rate, on the one hand, and any given nation’s funding cost, on the other. As that spread increases — and it’s been increasing wildly over the past few weeks in places like Greece — the moral hazard associated with this trade skyrockets.

And I think Boone and Johnson might also have touched on the important question of who’s buying PIIGS debt in general, and Greek debt in particular, at its current non-distressed levels. It’s not those emerging-market bond investors, crossing over into higher yields in Greece. They always price credit risk, and they don’t like what they see. (Remember that for many years Mohamed El-Erian was the most important and powerful emerging-market bond investor in the world.) Instead, it’s our old friends the banks, wallowing in the carry trade. They know, after all, that even if Greece isn’t bailed out, they will be.


- To Bailout Greece or Not to bailout? Please weigh in! read more about Bailouts in a free market economy only postpone Doom’s day: http://economicsforliberty.wordpress.com

- Greek default: the winners and losers…: http://wp.me/pPdcm-3b

- Greece’s Debt Crisis: A Sign of Things to come to a Hugely Indebted America? Read on at http://wp.me/pPdcm-2P

Posted by Orphe_D | Report as abusive

Goldman’s settlement strategy

Felix Salmon
Apr 29, 2010 13:12 UTC

I believe Mark DeCambre’s sources: Goldman Sachs is seeking to settle with the SEC — and with the hedge fund which invested in the “shitty” Timberwolf deal, too. More generally, if you bought any toxic assets off Goldman during the financial crisis, now is probably the best possible time to sue them for losses. And if you hold Goldman stock, definitely keep an eye on those class-action suits.

Goldman would dearly love to avoid the enormous embarrassment that would certainly accompany any lawsuit, especially if Goldman executives ended up having to endure hours of cross-examination from lawyers who will surely have worked out the best lines of attack from the 11-hour Senate hearings. The total amount it pays out in lawsuit settlements might be large, but it surely doesn’t want to risk going up against a jury, now that it’s had a taste of what public opinion feels like.

Memo to Planet Money, then: check the underwriter on that toxic asset you bought for half a cent on the dollar. If it turns out to be Goldman Sachs, you might be in for a windfall profit!


I think the surgeon that delivered Toxie was RBS. Didn’t they mention that in the episode with carpenters?

Posted by mehro | Report as abusive


Felix Salmon
Apr 29, 2010 06:56 UTC

Two great posts on Goldman by Steve Waldman — Interfluidity, ibid

This can’t be good: Spain Economy Min has no comment on S&P downgrade — Reuters

Married women should say ‘I don’t’ to changing their name — Globe and Mail

The Ultimate Goldman Sachs Metaphor Reel — HuffPo


Is Goldman Sachs the new Lenny Bruce? http://tinyurl.com/338y926

Posted by Gaw | Report as abusive

Is USAID broken?

Felix Salmon
Apr 29, 2010 06:50 UTC

My panel at the Milken conference was pretty sparsely attended, for good reason: not only was it up against comic-book superheroes, but it was also up against a real-life superhero, Clare Lockhart, who was on the Expeditionary Economics panel and who has some trenchant and compelling ideas about how to fix failed states. I was hoping to grab her for a quick video interview afterwards, but it was not to be, so in her stead I’ve been reading Chris Blattman, who has a couple of blog posts up which are very much in line with her thinking.

Chris has just returned from an unidentified small poor country, where he met the new finance minister, who got some very good advice. Donors will come, he said, and they will make three big mistakes: they will have high standards, with no tolerance for graft or pork; they will prioritize education, health and infrastructure over security and justice; and they will use NGOs to deliver aid.

Read Chris’s blog for why all of these are bad ideas in the world’s poorest countries, but certainly I’ve heard Lockhart explain things like the way in which NGOs undermine a country’s bureaucracy by stealing away its brightest, foreign-educated technocrats.

Interestingly, although Lockhart’s ideas are treated with a lot of respect in the Army, that doesn’t seem to be the case at USAID, which was generally considered a non-starter for any country interested in this kind of institution-building approach. Why? Blattman blames Congress:

The problem, however, might not be with USAID. USAID springs from Congress, a Congress that uses its charity as an instrument of foreign policy, has little belief in country ownership, and no real stake in actual development. Congress just might be getting the aid agency it deserves.

I don’t have the solution to this problem. I can barely organize my sock drawer. But we live in a world where the poorest government can safely say the US is irrelevant to its development strategy, and a leading member of the Senate can speculate in all seriousness that the main US aid agency should be wound up. This should deeply alarm us.

One of the few genuinely strong areas of the Bush administration was in the area of foreign aid and development, but it’s understandable that the Obama administration hasn’t made it a priority, and clearly there’s still a lot of work to be done to maximize the efficacy of U.S. aid in general and USAID in particular. Maybe they could start by talking to the Army a bit more.


Sorry, Felix, but I would’ve attended the superhero panel too.

Posted by drewbie | Report as abusive

El-Erian says Greece will default

Felix Salmon
Apr 29, 2010 01:50 UTC

Mohamed El-Erian has an important piece on Greece in tomorrow’s FT; if you want to boil his 750-word article down to 3, it’s basically “Greece will default”.

El-Erian comes to this conclusion using three logical steps. The first:

A number of things have to happen very fast over the next few days to have some chance of salvaging the situation. At the very minimum, the government in Greece must come up with a credible multi-year adjustment plan that, critically, has the support of Greek society; EU members must come up with sizeable funds that can be quickly released and which are underpinned by the relevant approval of national parliaments; and the IMF must secure sufficient assurances from Greece (in the form of clear policy actions) and the EU (in the form of unambiguous financing assurances) to lead and co-ordinate the process.

And a squadron of flying pigs dropping 100-euro notes from helicopters across both the Greek and Iberian peninsulas would probably help too. The fact is that far from all of these things happening in the next few days, the base-case scenario is that none of them will. (The “sizeable funds” might appear, but don’t believe for a minute that national parliaments won’t object.) And on top of that, El-Erian notes drily that “the official sector has yet to prove itself effective at crisis management” — or, to put it another way, if you really think the IMF can cope with a Greek crisis, just look at how it coped at previous crises in Asia, Russia, and Latin America.

The second part of the argument is this:

The disorderly market moves of recent days will place even greater pressure on the balance sheets of Greek banks and their counterparties in Europe and elsewhere. The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full- blown crisis for Europe.

This, in a sense, hardly needs saying: all public finance crises are also banking crises. The world has never seen an insolvent country with solvent banks, and Greece won’t be the first. But of course it’s not just Greek banks we’re worried about here, it’s also other banks across Europe — French, German and Swiss banks in general, and Fortis, Dexia and SocGen in particular, seem to be particularly at risk. Greece has always borrowed heavily from abroad, and its lenders are now in a very tough spot; needless to say, all those banks will get bailed out before they’re allowed to fail.

Finally, concludes El-Erian:

Absent some remarkable change in the next few days, things will get even more complex for the official sector. It may have no choice but to combine its own exceptional financing efforts with talks on a controversial approach that will be familiar to veteran emerging market observers – PSI, or “private sector involvement”.

PSI is the polite way to talk about the restructuring of some of the sovereign debt held by the private sector. It is based on a concept of burden-sharing in a disorderly world. It can appeal to governments as a seemingly easy way to ensure that massive public sector support to crisis countries does not flow back out in the form of payments to private creditors. Yet PSI is also hard to design comprehensively, harder to implement well and involves collateral damage and unintended consequences.

This is the “Greece will default” bit. El-Erian doesn’t quite come out and say so directly, but that’s how I read his “may have no choice but to” language: it’s about as close as the CEO of Pimco can come to saying that Greece will default without being accused of inciting panic. He even provides the requisite euphemism for the public sector to use: “private sector involvement”.

Consider the alternative, which is that the bulk of any EU/IMF bailout package would go to paying off in full all those speculators who have been buying Greek debt at 18% interest rates. It’s the too-big-to-fail problem all over again, exacerbated by the fact that if Greece gets a bailout, you can be sure that other countries are going to want one too, starting with Portugal, and working on from there. At some point, the German population simply won’t abide it: they’ve got their fiscal house in order, and they understandably don’t want to spend their hard-earned euros on paying off the debts of countries which, as Tyler Cowen puts it, “have been pretending to be much wealthier than they really are and to make financial plans on that basis”.

A Greek bailout package — any bailout package, really — is much more palatable when there isn’t anybody obviously being bailed out: when the distressed and insolvent borrower has to endure painful austerity, and when its lenders too suffer a certain amount of pain. To put it in US terms, we’re looking for something much more like GM or Chrysler, and much less like Bear Stearns. But of course GM and Chrysler were put into bankruptcy, and there’s no such thing as sovereign bankruptcy, which makes the whole problem that much more difficult and prone to what El-Erian calls “collateral damage and unintended consequences”.

El-Erian talks about how this approach “will be familiar to veteran emerging market observers”, but there’s a lot going on here which we haven’t seen in emerging markets before: a debt-to-GDP ratio of well over 100%; a country facing default which still has two investment-grade credit ratings; and, of course, the formal economic and monetary ties to risk-free developed nations.

It’s worth remembering Mexico’s tequila crisis of 1994-5. That was a liquidity crisis, not a solvency crisis, but even then the US bailout (a now-tiny-seeming $20 billion) had to come from a little-known Treasury slush fund since there was no way that it was going to receive Congressional approval. What’s more, the US ended up making a profit on that bailout, while as every German knows, any Greek bailout funds are unlikely to be repaid in full. And the US aid was extended only after Mexico had devalued and thereby become competitive again.

It’s impossible for Greece to devalue without defaulting, given that all of its debt is in euros. El-Erian doesn’t talk about devaluation in his article, but it’s clearly still a possibility. A default, meanwhile, is increasingly looking like it’s probable in the short-to-medium term, and near-certain in the long term. Countries have come back from high debt-to-GDP ratios in the past. But not with interest rates at these kind of levels, and only through devaluation.

I think I’m going to go join Paul Krugman under that table.


Default and recreate the drachma? really? This plan would work if Greece could be a 100% self sustaining economy that no longer needed to be part of the rest of the world. If a country borrowed money and traded with other countries ran up a big tab and decided rather than working hard and paying it off it would simply devalue its currency by say 10000%, why would countries and foreign companies ever do business with it again?

Posted by outlawnyc | Report as abusive

How Goldman offloaded its toxic assets

Felix Salmon
Apr 28, 2010 21:38 UTC

Chris Nicholson finds a particularly damning email in the mountains of evidence released by the Senate investigations committee. It’s written by someone on Goldman Sachs’ European sales desk:

Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant. Aggregate loss of our clients on just these 5 trades along is 1bln+. In addition team feels that recognition (sales credits and otherwise) they received for getting this business done was not consistent at all with money it ended making/saving the firm.

Clearly Goldman’s clients aren’t buying what Lloyd Blankfein is selling: the idea that they’re just arm’s length counterparties who know what they want to buy and are just looking for the best price. Illiquid things like CDOs are sold as much as they’re bought, and Goldman’s highly-paid sales team was aggressively going out and selling instruments which were at one point on Goldman’s balance sheet and which wound up cratering in value.

The effects were twofold: firstly, the Goldman clients who got stuck with this nuclear waste when the music stopped were understandably none too impressed with Goldman. And secondly, Goldman managed to stick the losses on those instruments to its clients, rather than taking those losses itself, and as a result its profits were billions of dollars higher than they would otherwise have been.

Was the hit to Goldman’s franchise value a hit worth taking, given the billions of dollars it saved? Probably yes, until the SEC and Carl Levin came along. But clearly the European sales team which was responsible for successfully offloading this nuclear waste wanted to see some part of those billions of dollars in savings for itself. Because, like all Wall Streeters, they care more about their annual bonus than they do about their employer’s franchise value.

Here’s a question, though. Let’s say you work at an investment bank and you’re in charge of a book which includes a $1 billion barrel of toxic nuclear waste. You know that barrel is going to zero sooner or later, and you manage to sell it to some European dupes just in time, for full face value, saving your bank from $1 billion in losses. How much of a bonus, if any, should you get on that deal, and where should the money come from? And should you feel bad about avoiding the losses and sticking them to your clients instead?


Danny Black,

You are evading the central question. Do you trust Goldman when it comes to investing in a product they are selling? Would you tell some 50 year old relative who is planning retirement that Goldman is trustworthy?

The issue is not how did the investments turn out. The issue is trust.

Posted by randymiller | Report as abusive

Why did all those super-seniors exist?

Felix Salmon
Apr 28, 2010 19:23 UTC

Pablo Triana asks, via email, about all that super-senior risk that was sloshing around the financial system when everything imploded in 2008. Did most of it actually need to exist? Or was it a conscious and voluntary decision on the banks’ part to create it and, often, to hold on to it?

Clearly with cash CDOs, the super-senior tranche has to exist. And equally clearly, after looking at the Abacus deal, it does not have to exist in synthetic CDOS. This was news to me, but conceptually it makes sense — since a synthetic CDO is a zero-sum bet between two parties, they can happily bet just on the performance of some tranche without there needing to be a parallel bet on the performance of some other tranche.

It’s worth adding here that technically synthetic CDOs are not zero-sum bets: because investors buy them with cash, that cash has to be invested somewhere, and the interest earned on it makes the CDO a positive-sum game overall. Think of the senators who said yesterday that Goldman Sachs was just running a casino: it’s one of the more popular of the Goldman metaphors these days. In a casino, if you’ve made a big bet, the house will happily comp your room and your drinks. And if Goldman sold you a synthetic CDO, it will give back to you the interest that your money earns before it gets shipped off to John Paulson.

But the fact is that when cash CDOs gave way to synthetic CDOs, it was possible for the banks creating these new instruments to solve the problem of super-senior tranches by simply never creating them in the first place. Instead, they did create them, and when they couldn’t insure them through AIG any more, they just kept them on their books instead. Why?

I think there are two main reasons. The first is that the people buying the short side of the deal had done a lot of work on mortgage-backed securities, and knew which kind of securities they wanted to go short. When banks put together synthetic CDOs, they would fund the long side by selling bonds to investors like IKB, and they would fund the short side by selling subprime CDS to investors like Mike Burry or Andrew Lahde. And in the middle, the synthetic CDO structure allowed them to turn the interest payments from the shorts into a income stream that they could then sell to the longs.

But if you do it that way, you’re bound to end up with a super-senior tranche. The only way to avoid having a super-senior tranche is to fund the short side not by selling protection on subprime bonds to people like Burry and Lahde, but rather to sell protection on certain tranches of the synthetic CDO itself to a sophisticated investor like Paulson who understands exactly how the structure works because it was his idea in the first place.

In Michael Lewis’s book, Burry is surprised when he finds out that his short positions are being bundled into synthetic CDOs: he was never an active participant in structuring these things, partly because he never had $15 million to pay to Goldman as a fee. If Goldman had tried to sell Burry protection on the triple-A tranche of an Abacus CDO, he wouldn’t have been interested: the structure was extremely complicated, and if he wasn’t involved in creating it, he couldn’t be sure that his analysis would play out as expected. People like Burry just wanted to look at bonds in the market and buy protection on them.

And it seems that even Paulson felt the same way: for all intents and purposes, his role in the Abacus deal was to buy protection on a bunch of subprime bonds. He did so in two different transactions: the central Abacus deal with ACA and IKB was one, and then there was a separate super-senior deal. And the equity tranche never existed or got funded. But essentially what Paulson ended up with was very similar to what he would have got if he had simply bought protection on the bonds. Maybe that’s why Goldman ended up with that 45-50% tranche: Paulson didn’t really have much interest in buying protection on this slice or that slice, he just wanted protection on the whole thing.

So while in theory it was possible to put together synthetic CDOs where the super-senior tranche didn’t exist, in practice it seems that such things were pretty much impossible to sell to the relatively small universe of protection buyers.

And then there’s the second reason why banks felt comfortable holding on to super-senior risk. John Cassidy writes today about how the banks failed utterly to deal well with model risk:

The risk models that were commonly used on Wall Street failed abysmally. Not only did they fail to protect their users from a bad outcome, they made such an outcome far more likely. In short, the risk models added to systemic risk.

In part, this was a failure of statistical modeling. The techniques that the risk modelers used weren’t up to the task they set for themselves. But it was also a problem of how the models were used. Rather than looking on them as a useful but limited tool, banks and other institutions used them as a substitute for proper risk management, and as a justification for taking on more leverage and more risk. This explains how the risk models made the entire system more risky.

The risk models all considered the super-senior tranches to be significantly safer than triple-A, and the banks’ internal risk-management systems loved that kind of thing, especially when those tranches paid out even a tiny amount over Libor. After all, Libor is only double-A, and if a bank can fund itself at Libor and make a profit by investing in what the models said were completely risk-free securities, then why not do that? As Cassidy explains,

Model-based risk management seduced the regulators, too. Under the Basel system of international banking regulation, big financial institutions were allowed to use their own risk models in setting their capital reserves. Alan Greenspan and many other policymakers insisted that the development of “scientific risk management” had made the system a lot safer.

Finally, of course, there’s the old question about incentives and executive pay. No one ever got paid a seven-figure bonus for refusing to do a bad CDO deal, while lots of people (like Fabrice Tourre and the other Goldman types we saw getting grilled yesterday) got paid millions for doing them. Including a super-senior tranche undoubtedly made it much easier to do more and bigger synthetic CDOs, and so that’s what the structured-product desks did. You can call it regulatory arbitrage if you like, or you can just call it the natural consequence of the incentives built into the bonus system. Either way, banks like Citigroup and UBS lost billions on liabilities that senior executives never really even knew that they were holding. Because no one bothered to question the models underneath them.


Thanks Felix!

Posted by AnonymousChef | Report as abusive

Roubini on Greece

Felix Salmon
Apr 28, 2010 02:14 UTC

Nouriel Roubini, it can be safely said, gives good panel — especially when the subject is the eurozone and the possible disintegration thereof. He’s been bearish on the PIGS in general and on Italy in particular for many years now, but I don’t think it comes as much surprise to him or to anybody else that Greece is the first country really in the firing line.

One of the most interesting things about the status quo post-downgrade is that no one seems to have a clue what the base-case scenario is. Are the markets still expecting Greece to get bailed out, but adding on an ever-increasing yield premium to account for the possibility that it won’t be? Are they, like panelist James McCaughan, expecting an orderly debt restructuring later this year, with an effective haircut in the 20-40% range? They certainly don’t seem to be expecting anything worse than that — Greece’s bonds are trading at high yields, yes, but not at distressed levels, and there’s still room to lose a lot of money on those 2-year bonds if they end up defaulting.

My feeling is that the base case is one of muddling through for the next 2-3 years, with Greece scrounging up enough money from the EU and IMF to avoid a default, and Europe’s banks meanwhile staying profitable enough thanks to the ECB’s monetary policy that they build up their solvency for when the inevitable default does occur a few years down the road.

But it’s not clear that the markets are going to let that happen. It’s all well and good for the Germans and others to cover the Greek fiscal deficit for the next three years, and even to insist on tough fiscal adjustment at the same time. But if Greek yields stay anywhere near their current levels, there’s a good risk that would be politically unacceptable in both Germany and Greece. Sweden’s Bo Lundgren was also on the panel, and he helped explain how the Swedish population has the crucial and decidedly un-Greek ability to unite behind unpopular yet necessary policies once their political leaders have set a certain course. Greece, which is already seeing riots at any hint of fiscal austerity, just isn’t the kind of nation which is likely to decide that five years of wage cuts in a painful and deflationary recession is a price worth paying to stay current on the national debt.

Meanwhile, Tony Barber has already come to the conclusion that as far as Greece is concerned, “the political conditions for extra financial help from Germany just do not exist”.

Nouriel, of course, takes that kind of thinking to its logical conclusion, and kicked off the panel by announcing that it was just in time: “in a few days,” he said, “there might not be a eurozone for us to discuss.” There’s no way that Greece can implement the 10% spending cut it needs to do in order to stop its debt spiralling out of control at current interest rates — and even if it did, the economic effects would be disastrous.

Nouriel’s base case, then, is Argentina 2001: after all, Greece has a much higher debt-to-GDP ratio, much higher deficit-to-GDP ratio, and much higher current-account deficit than Argentina had back then. And if that’s the base case, there’s no way that Greek debt should be trading anywhere near its current levels.

Of course, this being Nouriel, it goes downhill from there: if Greece is worse than Argentina, he says, then Spain is worse than Greece. Its housing bubble and bust has left the banking sector much weaker than Greece’s; its unemployment situation, especially with the under-30 crowd, is much worse than Greece’s; and the cost of any Spain bailout would be so much more enormous than the cost of a Greek bailout as to be almost unthinkable. The only thing that Spain has going for it is that it isn’t quite at the edge of the abyss yet; if it gets its political act together and implements tough fiscal and structural reforms now, it can save itself. But clearly no one saw that happening, given Spain’s political history over the past 20 years.

There’s no good news here. The least bad course of action for Greece, in Nouriel’s eyes, is some kind of coercive yet orderly debt restructuring, which keeps the face value of the debt unchanged but which reduces coupons and pushes out maturities. And an exit from the euro. Alternatively, the ECB steps in and cuts interest rates so low that the euro gets pushed down towards parity with the dollar, which would accomplish something similar without nearly as much pain.

One member of the audience, though, had a really good question: what happens to the European system of sovereign guarantees of interbank lending? When those sovereign guarantees aren’t worth much any more, Euribor is likely to spike, since suddenly there’s a lot more credit risk involved in interbank lending. And there are hundreds of trillions of euros of debt contracts linked to Euribor, which could suddenly get very expensive and take control of short-term interest rates out of the hands of the ECB.

And in any case it’s worth remembering that even though Greece’s debts are small in relation to Spain’s, they’re still large in relation to, say, those of Lehman Brothers. And given that there is no formal mechanism for leaving the euro (or for defaulting on sovereign euro-denominated debt, for that matter), there will almost certainly be a range of unexpected and chaotic events somewhere down the line. That’s why I feel that although Greek bond yields are certainly going to be volatile for a while, we’re going to see higher highs and higher lows — there’s pretty much nothing, at this point, which could reassure the markets and turn Greece back into an interest-rate play rather than a credit play.

Even a massive IMF bailout, which is probably the best-case scenario for Greece right now, wouldn’t suffice to bring yields back down to their pre-crisis levels. As Nouriel pointed out, the IMF, as a preferred creditor, would make sure it was repaid, in the event of default, long before bondholders. And as a result, even if the probability of default dropped, the recovery value on Greek bonds in the event of default would drop as well. And so yields wouldn’t come down as much as you might think.

I covered emerging market sovereign bonds for many years, but I’ve never seen anything like this: a country trading at levels where the bear case is terrifying, the bull case is very hard to articulate, and everybody is talking about a possible default even when the country has an investment-grade credit rating from two agencies and is only one notch below investment grade at the third. Maybe the only thing which really explains what’s going on is that both yields and ratings are sticky. Which would imply that Greece has a long way to deteriorate from here.


Why do we run deficits AT ALL? Don’t we have some of the best-educated workers, and (at least in Northern and Eastern Europe) some of the most flexible and hardest-working?

Don’t we have great natural resources here? North Sea oil and gas… Good quality coal and metal ores…

Why on EARTH are we running at a DEFICIT?

Posted by compsci | Report as abusive