Okay, so the market is kind of sucky (that’s a technical term) today due to….GREECE! Just when you thought it was safe to go back into the water off the Greek Isles… Expect the markets to be shaky between now and 3PM Thursday New York time when we find out if the Greek bonds face an orderly default, or a disorderly default.
What’s the problem? Well, the word on the street is that they THINK (guesstimate) they only have about 70% to 72% of the bond holders on board for the orderly Greek default. They need 75%. And that 70% to 72% number is really IFFY. Because apparently no one really knows who owns the Greek bonds at this point in time. Apparently too many Greek bonds have traded hands in the last year, and so no one knows for sure.
And what’s the difference between and orderly Greek default and a disorderly Greek default??? Well, among other things, Credit Default Swaps. If holders vote to reduce their principal positions in an orderly default, no one gets paid on their Credit Default Swaps. If it’s a disorderly default, Credit Default Swap holders get to cash in on their positions. Who holds Credit Default Swaps? Well, Hedge Funds, among others. It’s kind of hard to imagine Hedge Funds, or anyone for that matter, voting for an orderly default if they stand to win big on Credit Default Swaps in a disorderly default. So what’s the big deal? Well the Institute of International Finance (IFF) estimates the worst case contagion costs at $1 Trillion. Certainly it would make the borrowing costs of the other weak sisters of the Euro (Italy, Spain, Portugal, etc.) much higher. And it would cut the legs out from under the International Monetary Fund’s (IMF) and the European Central Bank’s (ECB) ability to help the other weak sisters of the Euro. Which of course could ultimately kill any chance of an economic rebound in Europe.
And remember, a roughly estimated 45% of the revenue of the S&P 500 companies is derived from Europe. If the European economy catches the flu, the U.S. economy catches a cold. And our economy can’t afford to catch a cold right now.
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury
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