tisdag 14 februari 2012

Iceland Did ‘The Right Thing" Defaulting

“Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.”

Below and at 5:40 Mrs Malmgren has quite an interesting story to tell:

Pippa Malmgren Geopolitical Update January 2011

Iceland makes fledgling recovery from its economic meltdown
Iceland did what the United States chose not to do — allow its biggest banks to fail and force foreign creditors to take a hike. It did what troubled European nations saddled with massive debts and tethered by the euro cannot do — allow its currency to remain weak, causing inflation but making its exports more desirable and its prices more attractive to tourists.

Three years later, the unemployment rate has fallen. Tourism has increased. The economy is growing. The government successfully raised money from investors in the summer for the first time since the crisis.

The History Of Greek Sovereign Debt Defaults
Greece is at the center of the sovereign debt crisis that is worrying many investors and increasing the volatility of stock markets across the world. This is not a new phenomenon for that country, which has defaulted on its external debt many times since achieving independence at the beginning of the 19th century.Read more: http://financialedge.investopedia.com/financial-edge/0911/The-History-Of-Greek-Sovereign-Debt-Defaults.aspx#ixzz1mNfPOxIz

Sovereign default
The following list includes actual sovereign defaults and debt restructuring of independent countries from 1300 till 2008:

So conclution from the above is quite clear. Sovereign defaults has happen many, many times before in history e.g. in the USA (1790, 1862, 1933, 1971) , Germany (1932, 1939, 1948), Sweden 1812, Russia (1839, 1885, 1918, 1947, 1957, 1991, 1998), United Kingdom (1749, 1822, 1834, 1888–89, 1932) etc and when the debt is cleared off - that's then a really good thing both for it's citicens as well as for investors.

Obviousely the people taking the hit by a default are the lendors, the banks. And as long as the debs are not too big that's then a hit the finabcial system will be able to absorb as it always has been able to do.

This time however it's different as last couple of decades a new item has been introduced extensively on these financial markets and that is the so called derivatives.

The issue here is twofold. First these derivatives markets have been totally unregulated meaning - nobody today knows who sits on what risk and where.

Second issue is these markets size. Its estiomated these highly leveraged markets are worth at least $ 600 trillion. Emphesis here on - at least - This as when you're talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100times greater than investments that could be funded only in cash instruments.

The highest account leverage in Forex known today is 500:1 (actually, 1000:1 is the new leader nowadays!) Below is the choice of Forex brokers who provide 500:1 and 400:1 leverage options. Let's compare!

The world's gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into "trouble".

Who woulden't argue we haven't seen a fair amount of "trouble" in the world financial markets since 2008?

To sum all of this up - due to the extensive use of leverage only what in fact may be very minor negative derivative positions is able to completely blow up entire worlds. Thats why Warren Buffet has named these derivatives - "financial weapons of mass destruction". By using creative accounting such as marking assets at fictisiouse "booked value" rather than "market value" banks have been allowed to postpone the unavoidable.

Four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller. The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).

Now thats then why Greece hasen't defaulted just yet as what has been going on behind the scenes is all about trying to fire wall of the risk and damage to the banks made by a Greek, Irish etc default. Real question one need to ask is why we need to bother in the first place to protect and try to save these banks that already and in fact since 2008 have been insolvent?

Sure is that regardless of the size of the bailout there is no way any bailout or money printing may be fixing any insolvensy issue. Bailouts can fix a liquitity problem but never an outright insolvency dilemma.

Jim Sinclair: The Impending Undeclared Default Of 5 Major US Bank
The following interview with Ellis Martin of www.EllisMartinReport.com covers in detail the impending undeclared default of 5 major US banks this week by the International Swaps and Derivatives Association. This even has the potential to cause a second financial crisis that would require significant financial intervention. If you have time to spare, listen to this interview. If you don’t have time to spare, listen to it anyway.

Inga kommentarer: