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I don’t dabble in bond markets, but if I did…

April 12, 2010

I usually read David McWilliams’ column in the Sunday Business Post. They are informative and easily understood. I also read articles by other economists who disagree with him, but they don’t write as well.

McWilliams says, that based on past history, a sovereign Greek default is likely. Ireland needs to prepare, he says, because, with an even bigger debt burden, we will be next in the market’s sights. He says:

My suspicion is that Greece will default. By this, I mean it will repudiate debt by renegotiating the terms of the debt simply because the population won’t tolerate the hardship associated with unemployment and rising prices. Greece also realises that the financial markets are forgiving. They are forward-looking.

An EU bailout would just postpone this default.

I sense that smart bond investors will use any putative EU bailout as the last opportunity to sell. The clumsy ones will buy, believing the government and brokers’ spin.

Since that column was published Sunday morning, the EU has agreed to a Greek bailout of between €40 and €45 billion. MIT professor, Simon Johnson, is not impressed. It is a short-term fix, but the problem will re-emerge if the Greeks fail to tackle their underlying problems. He uses the same type of language to predict what bondholders will do:

Often assistance packages of this nature just help “smart money” to get out ahead of a default.  This could be the case here; 40-45 billion euros total money could last roughly one year.  Both Russia and Argentina got large packages in the late 1990s but never regained access to private markets, so eventually everything fell apart.

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One Comment leave one →
  1. April 13, 2010 3:58 am

    Yes. There is a distinct probability that Greece and others will renegotiate debt. It makes sense when we look at what is going to happen and how it has happened. The idea that there is an unpredictable business cycle and that banks were merely badly run is a canard. Once this is fully appreciated, then the term to use is economic warfare.

    Those who controlled capital and access by banks thereto, are responsible for the bubbles formed. They knew it was happening and it can be proven that they discouraged and sabotaged efforts to prevent it ever since, at least, 1999.

    Therefore, sovereigns, having taken responsibility, naively or otherwise, are entitled to take this guilt into account when considering repayment. The best way to do this is to reacquire the capital taken by the other side, and then negotiate from a position of strength and keep the economies concerned disrupted to the minimum. However, the inflation has also benefitted countries, although Ireland was lazy, greedy and astupid, the real uninflated activity will be far less than currently in the FIRE sector of the economy. Some collapse there is inevitable and nothing good comes from delay.

    Nama is a waste of time and money. But it can be sorted out in due course. Probably behind closed doors.

    In the meantime, fiat currencies must devalue. Norway, Australia, etc are almost gold currencies. They too may be vulnerable, if badly led. Interesting times. Many forces will be acting to make their agenda effective. Rigging markets is the least of it, but it will be widespread.

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