Comments on: The EU debunks the debt-speculation meme A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: y2kurtus Mon, 13 Dec 2010 20:35:34 +0000 To clarify the two points raised by Dan Hess and CavelCap:

For D.H. As the U.S. issues debts only in its own currency there really can’t be a traditional default. They will try and slowly inflate their way out of the debt… it’s worked since 1913 but I doubt it will go on for another 100 years. I see 10% plus inflation within 10 years.

for Cavelcap: some European countries (U.K. Swiss) issue currency, Most do not (Euro). The Greek, the Spanish, the Italians, can’t print there way out of trouble. They need to either exit the Euro than devalue than reduce wages or else swallow some very bitter pills… like 40% budget cuts… not easy.

Sorry to respond so late in the thread!

By: Domination Fri, 10 Dec 2010 20:09:01 +0000 In response to Dan Hess I would state that anyone who buys Japanese protection from a Japanese bank needs their head examined unless the counterparty risk of the trade is highly collateralised. This is an example of “wrong-way risk”. I tried reading the Hendry report but must confess that I found it so pretentious I had to stop. I am not sure he is credible.

By: CavelCap Fri, 10 Dec 2010 17:44:14 +0000 @y2kurtus I believe you meant 25% of GDP, since the relationship between a country’s deficit and a country’s budget would seem to be irrelevant with regards to the likeliness of default. Also, although there are some similarities between poorly run US states and poorly run European countries, I believe the differences are probably more important. The main one being European countries are currency issuers, whereas US states are not.

@Domination Your point is well taken, however, regarding your last statement, I believe their inaction is more likely to have stemmed from their worse than vague understanding of how their own economic system works than from their opinion of the future of Greek debt.


By: DanHess Fri, 10 Dec 2010 16:56:53 +0000 I for one do not understand why we continue to view CDS markets in such a positive light. It is as though we had so much fun taking an unexpected baseball bat to the skull that we think everyone should have a baseball bat.

Hugh Hendry reports in his December shareholder letter (which should be required reading for anyone who believes in CDS markets –> FELIX) that Japanese banks which earn just about nothing on JGBs are amping things up by selling sovereign CDS protection. So that’s who took over where AIG left off! 473-the-Eclectica-Fund-Manager-Commentar y-December-2010)

Which is really poignant. As Japan marches bravely into its own debt-armageddon, it earns pocket money along the way by swallowing live grenades. I love Japan very much and only a nation as awesome as them could carry out such a beautifully macabre death dance.

(1) Who thinks these CDSs sold by Japanese banks are priced properly?
(2) Who thinks these Japanese banks will be able to pay up for sovereign defaults when that firestorm envelops Japan?

By: Domination Fri, 10 Dec 2010 12:05:52 +0000  /2010/12/cds-ex-machina.html

If governments were so unhappy about the CDS market and confident that the wide spreads at which Greece CDS were trading exaggerated the default risk of the Hellenic republic bonds, then there was a clear course of action open to them.

They should have stepped in and sold 10 or 20 billion euros of Greek protection themselves at the height of the market – about 1000bps or 10% per year. Not only would this demand to sell protection on Greece have driven in Greek default swap spreads, they would in the process have bankrupted all the so-called speculators and made a killing for their respective governments.

The fact that they didn’t speaks volumes.

By: walt9316 Thu, 09 Dec 2010 23:06:42 +0000 The alleged moderator of these comments seems to be out bird-watching.

By: TFF Thu, 09 Dec 2010 19:25:14 +0000 Doesn’t the US have a deficit in excess of 25% of its budget? And pretty high debt per capita? Are you suggesting it is a very safe bet that the US will default?

By: y2kurtus Thu, 09 Dec 2010 17:31:42 +0000 I think it depends on your definition of speculitive. I think it is a very safe bet that states which have deficits larger than 25% of their budget and high debt per capita will not vollentarily meet their obligations.

To buy debt of those U.S. States or European countries like Greece is more of a speculation (that your debt will be repaid via a 3rd party) than an investment that Illinois or Ireland will directly pay you what you are owed.