Given my previous post, I wanted to discuss the implications of this totally unethical and convoluted maneuver designed to execute a default but call it something else and thus attempt to avoid triggering credit default contracts. The implications as I have said are dire. One of the key things our central planning financial engineers are doing is attempting to prevent these insolvency triggering contracts from bankrupting their buddies and revealing just how wide spread mismarking and accounting control fraud are in presenting an image of solvency when underneath lies a rotting carcass.
The situation as it exists in the markets, is now VERY similar to 2007 and 2008 when people realized that they could not execute on complex derivatives the way they expected. Only this time its MUCH bigger and its NOT just Greece that contains the issue. This last major phase of the ponzi scheme that has become our financial system has been constructed with leveraged accounting instruments. Every time someone needs to create more liquidity they can do it by creating arbitrary agreements with nearly no limits on leverage. Of course, the limits are "bankruptcy" and if you pocket a lot of coin before going BK then you are likely not to be that concerned with the bankruptcy part. Banks, in fact, are already generally insolvent, so these accounting tools allow them to present the masquerade that they are NOT. Reality, however, is that what is going on in Europe now is demonstrating that there is a much bigger issue than simply counter party risk. Its aggresive and desperate central planning and financial engineering risks.
Right now IF you own CDS, the clear and present goal of officials is to make sure that your premium becomes worthless and that you NEVER get paid the insurance. It does not matter that the Greece notional is not that large, what matters is the agenda. But this is what is happening as a result of the efforts of officials and the issues that I raised in the previous post. This is not that different from the credibility problem that the market has already suffered because regulators can not keep track of firms like MF Global even when they are in their offices for weeks and weeks before they manage to abscond with vast amounts of supposedly segregated capital.
One of the tenets of our financial system is supposed to be "trust". Officials from the Fed, ECB, IMF, IIF and other three letter acronyms are doing their level best to prevent too large to fail institutions from blowing up by playing havoc with trust needed to ensure that people believe that their contracts and accounts actually are what they appear and can be executed the way they say they can be executed. If there is a failure with these mechanics, the system fails - and especially since it is so completely overleveraged.
The meetings in Athens with the troika and IIF are conveluting and corrupting the basis of trust that hyper leverage via derivatives requires. Of course this is not the first time. The same thing happened in 2008.
The Disconnection of Trust...
Now we are staring down the barrel of a major disconnection within the financial system. A disconnection of trust. So, no matter what the officials and negotiators come up with this weekend, there is one clear result: Greece will have defaulted. The other result will be that officials will make clear that when push comes to shove, they have no respect for contracts in general and especially the contract based derivative financial instruments that are, in fact, the only thing allowing the system to pretend to be functional now. If you happen to own some of these instruments then you are faced with the same questions that many people who had money at risk in transactions with AIG, Lehman and Bear Stearns. Their answer was to short the stocks of these firms as hedges against their impending defaults. Of course, deleveraging and defaults are anything but orderly…so, the best laid plans tend to become something other than intended, and many were forced to resort to the less than elegant approach of selling these companies and other companies short as protection.
So, with the ECB and its cohorts willing to stop at nothing to make sure individual investors are mauled and tortured…what would you do if you could not count on your CDS to trigger or pay off due to counterparty or event risk? Why, you would probably look for another method, likely not so dissimilar to situation in 2008. This would lead you to short the EURO directly in order to execute what turns out to be a synthetic version of CDS.
Ironcally, this is in fact exactly what is happening. The huge increase in short interest in the EURO is not just speculation - its protection. So, despite the rally in the EURO over the last nine session the short open position has increased each week - currently at 197,818 contracts up from 181,662 contracts two weeks ago. It is not likely going to go away anytime soon. The central planners have done everything they can to force people into not being able to trust the most basic assumptions and truths that they needed to function in our or any financial system…so now the result is synthetic CDS applied via currencies and betting against the entire corrupt system as protection.