{"id":22979,"date":"2011-06-19T07:35:17","date_gmt":"2011-06-19T07:35:17","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=767"},"modified":"2011-06-19T07:35:17","modified_gmt":"2011-06-19T07:35:17","slug":"enganando-a-mr-market-soy-el-rey-del-mundo","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/enganando-a-mr-market-soy-el-rey-del-mundo\/","title":{"rendered":"Tricking Mr Market: Am I the King of the World?"},"content":{"rendered":"

\"\"As ever, under cover of darkness and with malicious intent \u2013 that is to say, at the weekend whilst the markets are closed \u2013 the European finance ministers are meeting yesterday and today to try to square the Greek circle. The aim is to \u00abpersuade\u00bb private and public holders of Greek IOUs not to demand payment of their bonds upon maturity, but rather to \u00abvoluntarily\u00bb accept an extension of the maturity date that is as uncertain as the Greek state\u2019s creditworthiness.<\/p>\n

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The theory is unclear, but the practicalities are even less so. It will be difficult to agree on ways to incentivise banks holding Greek bonds to accept a rollover (or extension) of the Greek bonds they have piled up in their armoured mass graves. As a point of interest, I\u2019ll tell you that less than a year ago, the \u00abintelligence\u00bb and \u00abanalysis\u00bb departments of various Spanish banks were suggesting that we recommend the purchase of Greek bonds to our clients. The argument put forward was something along the lines of \u00ab\u2026the yield is very attractive and one mustn\u2019t forget that this is sovereign debt from an EU member state, and the other countries will never allow it to default\u2026\u00bb. Back then, we looked like the fools in the film, preferring the lower yields of US corporate debt or even French or German sovereign debt. The barrage was constant: faced with \u00abidentical\u00bb political risk (France, Italy, Spain, Portugal or Greece), who would resist the chance to earn a spread 2, 3 or 4 points higher on Greek bonds compared with German, French or even Spanish ones (Rodrigo Rato\u2019s unfunny joke<\/a><\/strong> is another example of how politically correct discourse distorts economic reality). Well, fortunately, we and many others have resisted a temptation which, in our view, was not even a temptation at all. Because although politicians insist on treating all risk as equal, Mr Market recognises vast differences in creditworthiness, and prices them accordingly. And that pricing usually translates into the assumption of real risk, which in turn also usually translates into larger figures, both in terms of losses and gains. It is a quasi-universal law, although politicians are determined to manipulate it, and most bankers are determined to believe it and spread it.<\/p>\n

\"\"This attempt at manipulation is going so far that between now and the next St John\u2019s Day, politicians are going to try to pull the wool over the markets\u00ab eyes. Yes, yes, you\u2019ve heard right. Something as dangerous and reckless as that. Because the theory goes that if Greek debt is rolled over and the quality of its coupons or yields deteriorates, the credit rating agencies will determine that a \u00bbcredit event\u00ab has occurred \u2013 a default, a restructuring, or whatever we wish to call it. The consequence of this would be that the rest of the peripheral debt would be left holding the baby; their prices would fall even further and the interest rate differentials (risk spreads) would skyrocket, plunging their (our) respective economies into irreversible misery. From that point on, the break-up of the periphery would be inevitable and the centrifugal force unstoppable. Therefore, the situation in the Eurozone is once again surreal and Kafkaesque in a way few others are: Greece\u2019s debt must be defaulted on, but \u00bbit must look like an accident\u00ab. In other words, without the creditors demanding payment, they must accept the seven-year rollover (in reality, to infinity and beyond \u2013 that is, until Greece regains its solvency and ability to pay\u2026), and furthermore, interest rates must be lowered relative to the market; and most importantly: that all this takes place without the credit rating agencies raising a peep to say that this constitutes a credit event. In other words, a default disguised as a \u00bbvoluntary contribution\u2019 so that the official absence of a credit event acts as an effective firewall. The squaring of the circle in its quintessential Euro-financial form.<\/p>\n

In the words of Luxembourg\u2019s Prime Minister Jean-Claude Junker, \u00ab\u2026If we were to take a step that would be rejected by the ECB, by the rating agencies and, consequently, by the financial markets, we risk setting the eurozone ablaze\u2026.<\/em>.\u00bb But \u2018e pur si muove\u2019 \u2013 in other words, we\u2019ll have to try and pull some plump rabbit or scrawny, sickly hare out of the hat, because the deadline is imminent and there\u2019s no money to pay it off.<\/p>\n

History tells us that rating agencies are easily corruptible. Let\u2019s say they\u2019re young ladies who smoke and address you informally\u2026 Mind you, they\u2019re looking increasingly weathered and wrinkled, although their make-up and overpowering perfumes mean that most people still believe they can find love in them \u2013 that is to say, reliable risk ratings. It is therefore not out of the question that surrealism might reach such heights that a Greek debt default might not be officially classified as a credit event.<\/p>\n

What makes me feel most dizzy is the arrogance with which politicians (in this case, European ones) believe themselves capable of manipulating Mr Market. They boast of recklessly tampering with the very fabric of the capitalist system, just as John Hammond, the elderly millionaire owner of Jurassic Park in Crichton\u2019s novel, used to do. Merkel, Sarkozy and other second-rate politicians display a disregard and contempt for the laws of the market that sends shivers down the spine. They may well manage to fool Mr Market (and therefore all of us), but the risk that this historic attempt at manipulation will blow up in everyone\u2019s faces is more than considerable. The fact is that anti-tsunami barriers, as we saw in Japan a few months ago, sometimes prove to be insignificant.<\/p>\n

To conclude, one final point. If Mr Market were to be permanently manipulated, it would be at the expense of the money supply generated by the ECB. This would put us in the same inflationary position as the US. Of course, if we\u2019re going to manipulate things, why not do the same with the \u20ac\/$ exchange rate\u2026 Spread your arms wide and feel the air on your chest and face. Now shout: \u00abI am the King of the World<\/a>\u00ab. Although I\u2019m not sure if I prefer this one: \u00ab\u2019I am the King of the World<\/a>\u00bb (Homer Simpson), at least our downfall would be funnier.<\/p>\n

You may also be interested in:<\/p>\n

Unsustainable insolvency <\/a><\/p>\n

Strength and weakness in the currency war<\/a><\/div>\n
The Era of Devaluations<\/a><\/div>\n

The Era of Devaluations (y2)<\/a><\/p>\n

\n

The Euro: strong or expensive currency?<\/a><\/p>\n

Euro: The Robin Hood of the Eurozone<\/a><\/p>\n

Reviving the Greek canary in the coal mine <\/a><\/p>\n<\/div>\n

Economy and politics<\/a><\/div>\n
\n

The Show Must Go On: Real Estate Defeatism Condemns Us to Mediocrity<\/a><\/p>\n<\/div>\n

More information at http:\/\/twitter.com\/ClusterFO<\/a>
\nYou can also join our social network at Facebook<\/a> and our professional network at Linkedin<\/a>.<\/p>\n

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<\/a><\/p>","protected":false},"excerpt":{"rendered":"

Como siempre, con nocturnidad y alevos\u00eda, es decir en fin de semana para que los mercados est\u00e9n cerrados, los ministros de finanzas europeos se re\u00fanen ayer y hoy para conseguir la cuadratura del c\u00edrculo griego. Se trata de conseguir \u00abconvencer\u00bb a los tenedores privados y p\u00fablicos de papel mojado heleno para que no exijan el […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[37],"tags":[],"class_list":["post-22979","post","type-post","status-publish","format-standard","hentry","category-reflexion"],"_links":{"self":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/22979","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/comments?post=22979"}],"version-history":[{"count":0,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/22979\/revisions"}],"wp:attachment":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/media?parent=22979"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/categories?post=22979"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/tags?post=22979"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}