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Michael Parmar  

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  • As rumored earlier, Greek debt restructuring talks have collapsed, with private bondholders unwilling to accept the IMF's insistence of a greater than 50% haircut. "Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach," says the IIF chief (negotiating on behalf of the bondholders).  [View news story]
    if greece defaults and all cds falls due then cds pays out 0, many insurers.banks collapse and EU goes under meaning biggest economic bloc in the world goes under, etc, etc....

    this is a bargaining game, the cooperative outcome is to deal, anyone holding CDS with a less than 100% probability of payout in the event of default has an incentive to explore a deal.

    in such a game, the cooperative solution is typically 50/50 split (both parties outside options are of equal value or worthless) which is where we were headed with the IIF/Greece.

    However, Hedgefund holders have a different valuation and the Greece/EU has to factor in the impact of the downgrade to its bailout requirements and EFSF role in the sustainability of the bailout plan (likely EFSF rating and funding changes), which means a reset to the talks
    Jan 14, 2012. 08:02 AM | 1 Like Like |Link to Comment
  • The Time Is Now To Take Profits On These 2012 Winners [View article]
    David says:

    "The market seems to have taken the European downgrades in stride, but this was a similar reaction to the downgrade of the U.S. ... it was Monday when the markets took a huge tumble. What's more, the euro is sure to start selling off and dropping lower, driving the dollar higher which is a huge negative for U.S. multinationals, acting as a tax on profits. On top of all this, here comes Greece again. Recent reports are stating Greece may not agree to the most recent austerity package and may have a hard default after all. The prospects of a debacle of this nature have not been priced in. The Greece issue was supposedly wrapped up."

    solid, succinct analysis that gets beyond the "stocks are up things are fine" view.
    Jan 14, 2012. 07:47 AM | Likes Like |Link to Comment
  • The Solution For The Eurozone Debt Crisis Is Actually Quite Simple [View article]
    Good article.

    Its a bit more complex than only moral hazard.

    The problem with pricing risk, especially when there is insurance/hedging involved, is also adverse selection. Government intervention interrupts price discovery there as well
    Dec 6, 2011. 07:44 AM | 2 Likes Like |Link to Comment
  • Picking Winners When Greece Defaults [View article]
    Thank you for a clear and well written article. If I understand correctly, you are arguing, contrary to current thinking, which is that with assets and debts currently priced in euro a default will have a large negative wealth effect; instead proposing that the euro will strengthen follwoing default and hence everything in sight at the moment is underpriced - a default will have a positive wealth effect?

    'tis a brave soul that would sail a small ship into a force 10 gale....
    Dec 4, 2011. 05:06 PM | Likes Like |Link to Comment
  • Why The Central Bank Loans Will Not Stabilize The Eurozone [View article]
    Liquidity freezes occur as part of a price discovery mechanism - please have a look at the piece I just wrote on this site on this subject
    Dec 4, 2011. 04:52 PM | Likes Like |Link to Comment
  • Why The Central Bank Loans Will Not Stabilize The Eurozone [View article]
    There are more immediate problems that the central bank intervention has raised, and one of those is by ex-ante intervention to prevent a liquidity squeeze tipping the Eurobanking system into a default scenario, they have prevented the markets from price discovery of the true value of risk.

    This has introduced a new set of uncertainties surrounding their role.

    Are things so bad that they HAD to intervene? or is the market simply paranoid and they are preventing that paranoia from becoming a self-fulfilling prophecy?

    The markets have priced in a Greek default but not a bank default.

    That difference is anywhere upwards of a few hundred points on most stock exchanges.
    Dec 4, 2011. 04:50 PM | 3 Likes Like |Link to Comment
  • Ambrose Evans-Pritchard sums up the EU impasse with one word: Merkel. For now, while insisting on increased power to police the budgets of sinner states, she offers precious little in return. In the end, he writes, "we may just have to hunker down yet again and wait for Germany to blink at last, or detonate the fuse."  [View news story]
    While this is not what the market wants to hear, Merkel IMHO is trying to steer Germany and the EU along the more sustainable long run path of having a "proper" fiscal union in place to underpin the currency union and any measures for common debt financing and transfer payments amongst the states.

    The nature of EU politics means she must first put out the simple message of "Nein!!" to quick fixes, but she has not ruled out eurobonds in the long term nor transfer payments.

    She is well aware the Germany did VERY well out of the EU of the 2000s and they, like the PIIGS have to pay just as much.
    Dec 4, 2011. 04:41 PM | 7 Likes Like |Link to Comment
  • The 'Fix' Is In [View article]
    Keynes called it the liquidity trap.

    Even when interest rates are very low - if investing prospects are poor and deteriorating, people will hold onto cash. With people holding cash and not investing, the economy is likely to continue to face poor prospects.

    Keynes' answer was more government spending. Part of the high government debt levels in 2008-9 were built up on the notion of Keynesian stimulus.

    Keynes never advocated "spend, spend, spend" - if governments cant get their spending back through higher taxes following the stimulus, the amount of proposed spending is inefficient.
    Nov 21, 2011. 07:45 AM | Likes Like |Link to Comment
  • The Party Line Crumbles in the Eurozone [View article]
    In a nutshell: Eu measures are months away, and seen as inadequate for long term (real economy) solutions: debt levels are unsustainable at present.

    The front line is the ECB and they don't have the firepower to intervene, short of printing Euro. They are neither mandated to do so, nor see it as a long term solution, which is mainly structural reform and closer fiscal harmonization, or dissolution of the Euro.

    Trichet today gave carte blanche to the bond vigilantes by saying " sometimes short term pain is necessary in the drive to acheive longer term goals"

    EU's major trade partner, the US, is now on an "austerity trajectory". With falling US PCE, stagnant employment and falling future govt spending, there is nothing in the horizon to indicate growth anywhere above 1% - 2% p.a. which is the productivity gains only (assuming the same rates of capital and labour utilization as at present).

    Emergin market growth rates can add about 0-1% growth p.a. to EU/US export growth if they continue growing bu they cant unless the US and EU grow their domestic/consumer sectors.

    In short, the market is now "correcting" for the end of the cheap money/monetary stimulus and pricing in the "real world" growth and risk rates.

    The ECB has taken stimulus off the table for now, so we shall see if the Fed resumes it. The conditions almost match those that prompted QE2.
    Aug 4, 2011. 06:12 PM | 1 Like Like |Link to Comment
  • China: No Hard Landing, But No Solution [View article]
    Michael, you say "Second it would put unbearable pressure on household income and consumption, and so ensure that the one thing China needs above all – a rapid rise in household consumption – is all but impossible."

    My understanding is that raising tax thresholds, plus controlling inflation would create higher disposable incomes for the rural masses. They seem to be an important and growing engine of growth for China. I read somewhere there has been 200%+ growth household appliance sales over the last year?

    Ok starting from a very low base and level of income, such growth will take a long time to filter through, but its in the right direction, isn't it?
    Aug 1, 2011. 05:20 PM | 1 Like Like |Link to Comment
  • Sovereign Debt: Has Europe Finally Discovered Alchemy? [View article]
    "EFSF .. appears to be viewed as a piggy bank.."

    Italy pulled a bond auction today, I read that as factoring in the outside option of having the EFSF lend funds if rates are too expensive. Im sure others read the same thing into the move.

    Perhaps other reasons existed
    Jul 25, 2011. 04:14 PM | Likes Like |Link to Comment
  • Reflecting on Europe's New Initiative [View article]
    Perihperal spreads are up today.

    Spreads on Belgian debt are also up.

    Perhaps the most alarming: Italy declined to rollover debt today, perhaps in the anticipation that if spreads ride further it can appeal to the EFSF for funding. That is not a good sign.

    The run on ITalian banks is back on as well, as well as withdrawal of deposits from Greek banks.
    Jul 25, 2011. 03:15 PM | Likes Like |Link to Comment
  • The plan for private-sector participation in the Greek rescue would constitute a "restricted default," says Fitch, noting the proposed debt exchange implies a 20% net present value loss for banks and other holders of Greek government debt. Once new bonds are issued, Fitch will issue new ratings which will likely be below speculative grade.  [View news story]
    That is somewhat unexpected since no one is not paying bonds.

    Greece is in a position to meet its debt repayments for the next few years thanks to the first bailout.

    Talk about jumping the gun.
    Jul 22, 2011. 11:42 AM | Likes Like |Link to Comment
  • Sovereign Debt: Has Europe Finally Discovered Alchemy? [View article]
    I think the biggest concern is the AAA rating.
    Jul 21, 2011. 11:00 PM | Likes Like |Link to Comment
  • Don't Underestimate EU Resolve [View article]
    I agree with you that lots of loose ends are there and I'm as skeptical about them - its far from a done deal.

    The so called 3.5% interest rate is if you look at the text an example rate, they actually say that EFSF funds cost 3.48% to raise hence they intend to lend at a low rate close to but above their balance of payments rate and that means currently at 3.5%. So with the future lending, if it rises above 3.48%, they will naturally raise the rate they lend at.

    At the same time, many things were not specified on purpose - e.g. leaving open the question of the size of fund with the possibility of raising it, mentioing collateral as you say - politicians like to keep their options open. Which is damaging to their credibility sometimes.

    My lingering concerns are
    1. the criteria for EFSF pre-emptive intervention which is to happen under "strict conditionality" - does that mean that ECB/EFSF will be given parameters to intervene continually or will strict conditionality be so strict that it never acts?

    2. EFSF has so many different objectives (Ireland, Portugal Greece bailouts; backstopping/recapital... some Italian/Spanish/Greek/... banks that failed or "nearly" failed the stress tests; Greek bond buy backs, plus unspecified plunge protection), that 440bn will run out pretty soon......

    But the positive is a key threshhold was passed today: the states realised this wasn't a Greek or PIIGs problem, its about EU survival; one for all and all for one vs a slow unravelling of the union itself.

    And I guess the implication of that is it requires closer fiscal union and better and more coordinated fiscal discipline.
    Jul 21, 2011. 10:14 PM | Likes Like |Link to Comment