Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
Chris - - -
This is a PS to the previous comment. If you can do any of the analysis discussed we will offer to post it as a feature article at Global Economic Intersection (www.econintersect.com/....
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
Chris - - -
I should have cited the Daniel Gros article. I am familiar with his work as he has posted at our site: econintersect.com/b2ev...
Yes, there is more CDS transparancy in Europe than in the U.S. accounting system. But I am still looking for someone who has done the analysis work to define what the overall CDS exposures are likely to be. There may still be some lack of transarency, however, because these sovereign debt CDSs have certainly become intertwined with U.S. banks. I don't have much of an idea about how the boundaries between the IFRS and GAAP function. Perhaps you can shed some light?
So I'll go back to my implied query in the comment reply to JBG - Has anyone dug out the data to define the interconnected global CDS exposures related to European sovereign debt and the European banks that hold much of it?
Chris, do you have (or know of) any work that does that? If so, perhaps you could get some of your "hoary chestnuts" roasting on an open fire.
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
JGB - - -
Setting aside your unauthorized use of humor, right back at you. I have been looking for somebody who can get to the data to address the CDS issue. If you recall the entire panic over the Lehman collapse, it was the lack of knowledge of what the final CDS exposure would end up being that was the biggest crushing burden in the next few weeks.
The situation is something like a giant loop of dominoes stood on end. If only one falls it can take out everything else in the loop.
In the fall of 2008 the biggest domino turned out to be AIG and something well over 100 billion (I think about $170 billion?) was poured into that hole in the dike.
Financial weapons of mass destruction, indeed.
But it's all good. Some people made many millions selling those bombs.
The Current Stage Of The European Crisis And The Phantom of Rescue [View article]
Seth - - -
Yes, the graphic is like a piece of Fantasia, but the message is when things are booming (euphoria) risk is highest and when there is despondency and depression there is more opportunity.
I'm one who likes to measure correlation functions and coefficients so the graphic does little more than amuse me. Consider it a cartoon, if you like.
Greek Debt: Being Given Away And Still Overpriced? [View article]
skiman - - -
My logic is simple but my explanation in the article may not be.
I am comparing the Greek bond to the comparable German bond. In the case of the two-year instruments, the German rate is negligible (0.43%) compared to the Greek rate (~45%) so the risk free interest rate was ignored in the back-of-the envelope calculation.
What follows may be more detailed than you need. If so, I apologize in advance.
When we come to the ten-year case, the German yield is around 1.8% and the Greek yield around 18% (that was on Friday, today over 19.5% last time I checked). Let’s take a hypothetical Greek ten-year auction at Friday’s yield. That means the implied return at maturity is principal plus 180% (ignoring compounding / reinvestment effects).
If no principal is repaid then 100% of the 180% can be applied to recovering principal and the remaining accumulated coupon payments are now 80%. (The spread to the 10-year bund accumulates to about 62% over ten years.) The two investments end up equivalent if the two ultimately return the same amount. That means that to recover 1,180 euro accumulated by the bund including return of principal, the Greek bond uses the first 1,000 euro to replace principal and the next 180 is the first year coupon. Any of the remaining 9 years of payments are in excess of the break even vs. the bund and can be considered a risk premium on a defaulting Greek bond investment (total principal default).
The assessment of the market price in this case is that if Greek 10-years default on principal completely, the most probable case the market is pricing (dividing line between making money and losing money vs. the bund) is for about 90% of the coupon payments to also be forfeited.
What if the ultimate haircut on principal is 50%? Then the accumulated 1,800 euro (for 1,000 face value and investment) is applied 500 euro to replace lost principal and 1,300 euro for interest payments. This means that the Greek bonds will exceed the return of the equivalent bund by 1,120 euro (1,300 – 180) if all coupons are paid. Equivalence of return is achieved when 3.8 years of Greek coupons are received (500 principal payment + 500 replaced principal from coupon payments + 180 additional coupons). The needed coupon payments to reach equivalence is 680 euro. That is 680 / 180 = 3.8 years of coupon payments. Payment of any of the additional 6.2 years of coupons is the risk premium for a 50% haircut.
If the market has priced the Greek 10-year correctly at Friday’s yield, the haircut for exact equivalence to the bund is 62% for the Greek bond. That is the reduction of principal repaid at maturity if all 10 years of coupons are paid at 18%. The math: 1,800 - 1,180 = 620, the amount applied to replace haircut.
Again I’ll repeat that these are back of the envelope numbers and will be modified if reinvestment/compounding are included.
Emerging Market Europe and the Rest of the World [View article]
SeekingTruth - - -
Good comment.
Deposed dictatorships all too often lead to further oppression. Start with the French Revolution which led to Bonaparte. Then we have the Russian Revolution which led to turmoil followed by Stalin. Look at Iran and Iraq. You cited Lebanon.
Then we have examples like the U.S. and South Africa which did become something better than what was overthrown. However, I think the stories with bad endings outnumber those with good endings.
On a statistical basis I expect evolution produces better outcomes than revolutions. On an anecdotal basis some of the good outcomes are spectacular.
Emerging Market Europe and the Rest of the World [View article]
wkl - - -
Yes, there is a potential for a "food fight" involving political unrest and violence. But the current situation is also an economic opportunity, a possibility discussed in an Op Ed by Indian investment banker Sunil Chandra. There is a link in the article, but here it is again: econintersect.com/b2ev...
Emerging Market Europe and the Rest of the World [View article]
Green River - - -
I was remiss in not referencing my recent article on Goldman Sach's reversal of opinion about China: seekingalpha.com/artic...
After officially pushing investment in China all of 2010, and at a very high level in December, this month saw a reversal of strategy to recommend "avoid China" in 2011. Goldman did leave the door open for a possible rebound in China late in 2011.
Yes, hot money is a fickle mistress and the hot money banker is a fickle master.
Cause of Today's Economic Crises: Too Much Thrift [View article]
Mansoor - - -
I love your parable. But Eduard has pointed out the aspect of the discussion that you missed: The U.S. economy is not a closed system. More and more, the exchange with the rest of the world is coming to dominate the internal economics. Yes, if we were to make the U.S. a self contained system, the parable would have more applicability. We could have a deflationary destruction of debt. However, the global economy diminishes the extent to which that can happen over a long period of time. Too much of the new money and debt is held outside out borders and the development of your parable becomes much more complex.
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
This is a PS to the previous comment. If you can do any of the analysis discussed we will offer to post it as a feature article at Global Economic Intersection (www.econintersect.com/....
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
I should have cited the Daniel Gros article. I am familiar with his work as he has posted at our site: econintersect.com/b2ev...
Yes, there is more CDS transparancy in Europe than in the U.S. accounting system. But I am still looking for someone who has done the analysis work to define what the overall CDS exposures are likely to be. There may still be some lack of transarency, however, because these sovereign debt CDSs have certainly become intertwined with U.S. banks. I don't have much of an idea about how the boundaries between the IFRS and GAAP function. Perhaps you can shed some light?
So I'll go back to my implied query in the comment reply to JBG - Has anyone dug out the data to define the interconnected global CDS exposures related to European sovereign debt and the European banks that hold much of it?
Chris, do you have (or know of) any work that does that? If so, perhaps you could get some of your "hoary chestnuts" roasting on an open fire.
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
Setting aside your unauthorized use of humor, right back at you. I have been looking for somebody who can get to the data to address the CDS issue. If you recall the entire panic over the Lehman collapse, it was the lack of knowledge of what the final CDS exposure would end up being that was the biggest crushing burden in the next few weeks.
The situation is something like a giant loop of dominoes stood on end. If only one falls it can take out everything else in the loop.
In the fall of 2008 the biggest domino turned out to be AIG and something well over 100 billion (I think about $170 billion?) was poured into that hole in the dike.
Financial weapons of mass destruction, indeed.
But it's all good. Some people made many millions selling those bombs.
The Current Stage Of The European Crisis And The Phantom of Rescue [View article]
Yes, the graphic is like a piece of Fantasia, but the message is when things are booming (euphoria) risk is highest and when there is despondency and depression there is more opportunity.
I'm one who likes to measure correlation functions and coefficients so the graphic does little more than amuse me. Consider it a cartoon, if you like.
Greek Debt: Being Given Away And Still Overpriced? [View article]
My logic is simple but my explanation in the article may not be.
I am comparing the Greek bond to the comparable German bond. In the case of the two-year instruments, the German rate is negligible (0.43%) compared to the Greek rate (~45%) so the risk free interest rate was ignored in the back-of-the envelope calculation.
What follows may be more detailed than you need. If so, I apologize in advance.
When we come to the ten-year case, the German yield is around 1.8% and the Greek yield around 18% (that was on Friday, today over 19.5% last time I checked). Let’s take a hypothetical Greek ten-year auction at Friday’s yield. That means the implied return at maturity is principal plus 180% (ignoring compounding / reinvestment effects).
If no principal is repaid then 100% of the 180% can be applied to recovering principal and the remaining accumulated coupon payments are now 80%. (The spread to the 10-year bund accumulates to about 62% over ten years.) The two investments end up equivalent if the two ultimately return the same amount. That means that to recover 1,180 euro accumulated by the bund including return of principal, the Greek bond uses the first 1,000 euro to replace principal and the next 180 is the first year coupon. Any of the remaining 9 years of payments are in excess of the break even vs. the bund and can be considered a risk premium on a defaulting Greek bond investment (total principal default).
The assessment of the market price in this case is that if Greek 10-years default on principal completely, the most probable case the market is pricing (dividing line between making money and losing money vs. the bund) is for about 90% of the coupon payments to also be forfeited.
What if the ultimate haircut on principal is 50%? Then the accumulated 1,800 euro (for 1,000 face value and investment) is applied 500 euro to replace lost principal and 1,300 euro for interest payments. This means that the Greek bonds will exceed the return of the equivalent bund by 1,120 euro (1,300 – 180) if all coupons are paid. Equivalence of return is achieved when 3.8 years of Greek coupons are received (500 principal payment + 500 replaced principal from coupon payments + 180 additional coupons). The needed coupon payments to reach equivalence is 680 euro. That is 680 / 180 = 3.8 years of coupon payments. Payment of any of the additional 6.2 years of coupons is the risk premium for a 50% haircut.
If the market has priced the Greek 10-year correctly at Friday’s yield, the haircut for exact equivalence to the bund is 62% for the Greek bond. That is the reduction of principal repaid at maturity if all 10 years of coupons are paid at 18%. The math: 1,800 - 1,180 = 620, the amount applied to replace haircut.
Again I’ll repeat that these are back of the envelope numbers and will be modified if reinvestment/compounding are included.
Emerging Market Europe and the Rest of the World [View article]
Thanks. I used your btflive link to get data for a News Brief: econintersect.com/b2ev...
Emerging Market Europe and the Rest of the World [View article]
Good comment.
Deposed dictatorships all too often lead to further oppression. Start with the French Revolution which led to Bonaparte. Then we have the Russian Revolution which led to turmoil followed by Stalin. Look at Iran and Iraq. You cited Lebanon.
Then we have examples like the U.S. and South Africa which did become something better than what was overthrown. However, I think the stories with bad endings outnumber those with good endings.
On a statistical basis I expect evolution produces better outcomes than revolutions. On an anecdotal basis some of the good outcomes are spectacular.
Emerging Market Europe and the Rest of the World [View article]
Yes, there is a potential for a "food fight" involving political unrest and violence. But the current situation is also an economic opportunity, a possibility discussed in an Op Ed by Indian investment banker Sunil Chandra. There is a link in the article, but here it is again: econintersect.com/b2ev...
Emerging Market Europe and the Rest of the World [View article]
I was remiss in not referencing my recent article on Goldman Sach's reversal of opinion about China: seekingalpha.com/artic...
After officially pushing investment in China all of 2010, and at a very high level in December, this month saw a reversal of strategy to recommend "avoid China" in 2011. Goldman did leave the door open for a possible rebound in China late in 2011.
Yes, hot money is a fickle mistress and the hot money banker is a fickle master.
Cause of Today's Economic Crises: Too Much Thrift [View article]
I love your parable. But Eduard has pointed out the aspect of the discussion that you missed: The U.S. economy is not a closed system. More and more, the exchange with the rest of the world is coming to dominate the internal economics. Yes, if we were to make the U.S. a self contained system, the parable would have more applicability. We could have a deflationary destruction of debt. However, the global economy diminishes the extent to which that can happen over a long period of time. Too much of the new money and debt is held outside out borders and the development of your parable becomes much more complex.