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The Great Attempt At Revaluation


The EU today decided they would put up nearly $1 trillion to prop up the debt markets. The EU governments, the ECB and the IMF will buy government and private debt to keep debt markets working.

Great. Now whoever owned Greek debt – banks and investors – can sell it to the ECB at prices higher than the market has recently dictated. While the markets perhaps went too low – you never know these days – the impact of this will be that the markets will now mark the debts too high. Why? Simple. If I know there’s a party on the other side, with a mandate to buy EU government debt with a warchest of $1 trillion, I’ll hold off selling until the price is high enough.

What this does though is to move the risk from the investors to, well, the governments and by inference, the taxpayers. If there is a default, the impact will be borne by every tax paying human or entity in the EU. Only now, it’s become a higher stakes game, because defaults will hurt everyone, and therefore must be avoided at all costs. Yet, the incentives for the PIIGS countries will be skewed. Their debt will be bought the most, in order to stabilize the Euro. That will mean the risk of holding Greek or Portuguese debt will be on the EU/ECB.

A default won’t hurt the banks or institutions, since they would have sold such debt as part of the bailout. It will hurt the countries and taxpayers as a whole; so why not default? If the countries default, they’ll have to do the same austerity measures to prove to NEW lenders that they are worth it. Typically in a default the old lenders are the new lenders – the same entities (pension funds, banks) play in the credit markets – and therefore they demand serious cuts and action before they will lend again. But this time the lenders are taxpayers. In case of a default, the banks haven’t been hurt so they’ll probably want to lend again. (After all, where else can they put the money)

What this has done therefore is transfer wealth to banks and institutions, stealing it from taxpayers. The US bailout did the exact same thing. The Japanese bailout did the exact same thing. The lesson to learn is to not learn any lessons.

We are in moral hazard territory, crossing the door of no-going-back. We live in a remarkably fast age, and even though I know this can take years to play out, I have a sinking feeling it won’t take that long.


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