Comment by adulau | Hacker News Reader

Comment by adulau | Hacker News Reader

"The total official financing will amount to an estimated 109 billion euro. This programme will be designed, notably through lower interest rates and extended maturities, to decisively improve the debt sustainability and refinancing profile of Greece."

Markets and especially the financial sector like banks (especially French banks) owning debt from Greece (or CDO) have positively reacted to the announce for a different reason that the one shown in the press IMHO. The major risk for the banks is the inability from a customer to pay their debt. With the current proposal the risk is again moved to the public sector where they will take the part of the debt that Greece cannot pay or pay with difficulties.

So for the banks, it's a great move as their current contribution is just a small part from their revenue removed of the interest rate on the debt while lowering down the risks of unpaid debt.

Without forgetting that the ECB is feeding the banks with a preferential rate (around 1%) for credit given to other countries by the banks with a higher rate (around 3-4%).

So the winner is clearly the financial sector. We removed the risks for you and States will cover by public financing. It's just like the "refinancing" for CDO in 2008...

Absolutely. Indeed risk is not even just about the "customer's" (in this case, the nation of Greece) inability to pay, but also counterparty risk. It's not just Deutschebank that's on the hook for defaulted Greek debt, but every counterparty who wrote them credit default swaps (CDS) on that debt. That's what triggered the financial crisis in 2008 - as Bear Stearns' and Lehman Brothers' cash flow from their debt holdings dried up, redemption calls for their CDS metastasized though the financial system.

If anyone is wondering why the core Euro-area (not to mention the US government) is so concerned about Greek (and Irish and Portuguese and Spanish and Italian) debt, it's less about some abstract political commitment to EU unity than it is the simple fact that a true default will destroy the European banking system.

Throwing cheap cash at the problem will work until the day that it suddenly doesn't. While the proximate cause to the original financial crisis was cash flow, that is not the ultimate cause for these problems. The problem is that risk in the financial system is (still!) extremely opaque, and it is not so much that banks are illiquid as there is almost no circumstance in which they could procure enough cash to meet calls on their outstanding CDS in the event of some "unexpected" event like subprime mortages or Greece going into default.

The US government learned the hard way what would happen if they allowed one of these overlevered banks to go under as they did with Lehman Brothers in 2008. On the other hand, national governments do not have enough capital to possibly cover the total liabilities in the financial system, nor can they even predict when and where that capital might be needed.

As with many things in life, there is no real good solution to this, and there is still lots of pain ahead.

There is a good solution, namely this, transparency. Just like the law requires manufacturers of food to label what goes into the box, so sellers of aggregated derivatives should label what goes into their CDOs, CDSs, etc. This would enable to buyer to have half a chance at assessing the risk attached. Seller won't do this however until they are forced to do it because they don't want to say what is in the secret sauce. The only reason I can fathom that someone would want to buy a "mystery gift" derivative is greed.

As Warren Buffet says, "I hold my nose and point towards Wall Street."

But the contents of each CDO and CDS was/is completely transparent to the buyer and seller. Maybe the buyers were less sophisticated than the sellers, but that's really too convenient an excuse. The whole CDO construction process was openly called 'Ratings Arbitrage' after all.

I agree that things should be transparent : And so the right thing to do is to force all CDS to clear vs. a central counterparty, with publicly known mark-to-market pricing. Similarly, banks should be required to mark-to-market on an arms-length basis. But somehow this legislation never gets passed...

i think this is the real story here, agreed.

The real story is that this problem has been kicked into the weeds. Greece is still fundamentally over spending; it has been spared some momentary pain, but there is far more to come. My gut feel is that it will take the larger part of 30 years for Greece to right itself unless Germany and France find some way to "pay" Greece its "dues" for keeping the Euro "artificially" low and bolstering Northern European exports to the rest of the world.

Germany and France is part of western Europe. In Northern Europe only Finland and Estonia (as of very recently) has the Euro.

You're right of course. However, in covering the crisis people have often referred to a rough north/south divide among Euro countries. I think he was referring to big "northern" exporters like Germany and France, vs "southern" Mediterranean countries like Greece, Spain, and Portugal.

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