Scene: Harvard economics class in 2020 taught by Ben Bernanke. After a late night of studying, a student falls asleep in class. This sent Bernanke into a frenzy and he came over and pounded on the desk, demanding an answer to a question he had just posed. The student, shaken but now awake says “I’m sorry Professor, I missed the question — but the answer is increase the money supply…”
Can the US default?
April 1st, 2010 by Dina No comments »Bill Gross doesn’t think so… well, kinda. In his latest commentary, he asks if a country can get out of a financial crisis by issuing more debt, and believes that it can as long as it meets three conditions:
1. Can a country issue its own currency and is it acceptable in global commerce?
2. Are a country’s initial conditions (outstanding debt, structural deficit, growth rate, demographic balance) moderate and can it issue future public debt as a substitute for private credit?
3. Can a country’s central bank be allowed to reflate via low or negative real interest rates without creating a currency crisis?
Based on this, its fairly safe to say that the US won’t default on it’s debt, but Treasury bonds are a far cry from good investment, especially given the deficit, which, in the end, may need to be solved by printing more money. And that thing called ObamaCare certainly won’t help.
On a side note, last month Gross talked about how corporate spreads may be tightening as sovereigns become riskier and there may be a “unicredit bond market.” Interesting point – which would be safer: a global AAA-rated corporation that is essentially currency-independent or a country with trillions of dollars of debt?
innovative marketing by smith & wollensky
February 21st, 2010 by Avi 1 comment »http://www.steakforstock.com/
This highly regarded and prestigious steakhouse in midtown is adapting to the changing times. Now you can buy your excellent steak in exchange for stock. I guess the barter system is partially back. For instance one share of Citigroup will buy you 1/2 an order of creamed spinach. But a share of JP Morgan will get you a lobster tail. Hm a new valuation tool?
Greece and Swaps
February 10th, 2010 by Avi No comments »http://www.spiegel.de/international/europe/0,1518,676634,00.html
Greek Debt Crisis
How Goldman Sachs Helped Greece to Mask its True Debt
By Beat Balzli
Greek Finance Minister George Papaconstantinou speaking at a conference in January.
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Greek Finance Minister George Papaconstantinou speaking at a conference in January.
Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.
Greeks aren’t very welcome in the Rue Alphones Weicker in Luxembourg. It’s home to Eurostat, the European Union’s statistical office. The number crunchers there are deeply annoyed with Athens. Investigative reports state that important data “cannot be confirmed” or has been requested but “not received.”
Creative accounting took priority when it came to totting up government debt.Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn’t exceed 60 percent.
The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.
Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. “Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,” one insider recalled, adding that Mediterranean countries had snapped up such products.
Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.
Fictional Exchange Rates
Such transactions are part of normal government refinancing. Europe’s governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.
But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.
This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer.
In previous years, Italy used a similar trick to mask its true debt with the help of a different US bank. In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent. According to today’s records, it stands at 5.2 percent.
At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.
The bank declined to comment on the controversial deal. The Greek Finance Ministry did not respond to a written request for comment.
iPad
February 2nd, 2010 by Andrew No comments »Kicking off 2010 with record high earnings, Steve Jobs completely overshadowed Apple’s achievement by releasing his newest brainchild to the world, the iPad.




