FLIGHT AND FOLLY: CREDIT DEFAULT SWAPS, MONEY MARKETS - IS EUROZONE ON 'YOUR OWN'?

[This post is under construction].


At the age of seventeen, Winston Churchill prophesied an attack on London such as had never been witnessed. Related in Professor Niall Fergusson's Empire: How Britain Made the Modern World, Churchill intoned:

"I can see vast changes coming over a now peaceful world; great upheavals, terrible struggles; wars such as one cannot imagine; and I tell you London will be in danger - London will be attacked and I shall be very prominent in the defence of London....I see further ahead than you do. I see into the future. The country will be subjected somehow to a tremendous invasion...but I tell you I shall be in command of the defences of London and I shall save London and the Empire from disaster."



In Spirit of Love, one discerns the gargantuan risk of very expensive divorce proceedings disrupting the European family.

At the same time, I think one could adopt the metaphor of a 'London' Moment tearing the sovereign fabric of the eurozone. But do we have Churchills waiting in the wings to tide Europe to safety? Or will the flight-from-liquidity become a fight for the exits?

In Spirit, the authors primarily discuss the technical aspects of formal default set against the alternative scenario of a Greek move for the Euro exits by outright or partial default.


reference entities

physical settlement matrices

money market problems

Irish Central Bank

lack of political credibility

continental sovereign risk

can we play through the crisis?


Churchill quote

Is this 'London' Moment?

Fergusson's Empire

Credit Event, according to authors, could range from 'discrete' to 'general cataclysm'.

One only has to recall, as Fergusson does, Charles II's 'Stop of the Exchequer' and the concourse of financial default over the centuries. (Cf Rogoff).

Relevant obligations will be affected, and possible credit events triggered, by repudiation/moratorium, outright default or restructuring - ie controlled or partial default. This is after all applicable 'grace periods'.


Redenomination to 'debtonation'? Problem of 'Permitted Currency'.

With strong or rapid deterioration of the euro currency, will everything be permitted?


To return to Churchill - a strong proponent of European union and permanent integration:

"Every prophet has to come from civilisation, but every prophet has to go into the wilderness. He must have a strong impression of a complex society and all that it has to give, and then he must serve periods of isolation and meditation. This is the process by which psychic dynamite is made."

A RESOLUTION, OR JUST ANOTHER 'SOLUTION'?

In partial recompense and resolution, I believe European sovereign debtors will require a 'strong and steady' devaluation in line with the markets. This will then have to cascade to corporate borrowers with the untidy prospect of mass bankruptcy. The question is whether outside market participants such as shadow banks and hedge funds will hold off on speculative frenzy thereby averting collapse of this Hogarthian 'carousel of fools'.

Quite apart from substantial 'haircuts', profligate - and unfortunately, perhaps more circumspect yet exposed - borrowers may have to stretch the maturity of their eurozone debt over much longer periods of time to avert collapse.

Though Keating denigrates her as the archetypal 'worry wart', Angela Merkel may yet see fit to institute a much deeper bailout AND RESTRUCTURE fund to limit contagion to other eurozone members; and as I have said before, Germany must not turn its face against a well-designed and instituted Eurobond.


Whatever the solution, time is only just on Europe's side..