Why is Alexander The Great's Greece "not allowed to Default"

           Before Entering to topic of why "not allowed to default" let's touch base on why it is defaulting. In one sentence answer is "There is no Alexander the great left in Greece". Countries who have trade / budget deficit, have been going bankrupt for a while. India went bankrupt in 1991. Indian Rupee was devaluated.Russia went bankrupt in 1998. This is no new thing. Over the time great nations adjust themselves and again thrive form it.
           Now is "Greece too big to fail"? Looking into numbers, GDP of Greece $318.1 billion (2010 est.) is smaller than revenue of Exxon Mobil  US$ 383.221 billion (2010) That does not mean it's small number but if you look at world GDP 74.54 Trillion it's hardly 0.4 % of it so it does not sound like too big to fail. Then why there is so much hue and cry on Greece. I think there are multiple reasons behind this complex issue. 


# First of all Greece is not issuing it's own currency ECB (European Central bank) issues it. Hence the standard solution of de-valuating currency and get rid of debt won't work. (One that India and Russia Used during their balance of payment issue)
# Secondly Greece is just tip of an iceberg. What happens with Greece may happen with all (PIIGS) Portugal, Ireland, Italy, Spain and even Finland. If they all default, the viability of Euro as Single currency will almost come to an end.
# Therefore Germany the main force behind Euro is not allowing any sudden default / uncontrolled action from anyone.

European Debt Crisis

On the top of all this the very less discussed but very very crucial reason behind "not allowing" must be CDS (Credit Default Swap). This is how CDS work..


1) Let's say Deutsche Bank  buy  10 Yr bonds form Greece government or any corporate. In order to "mitigate Risk of  bond default" they also buy CDS (kind of Insurance) form other bank. Say JPMC; based on risk involved in Bond JPMC charges "CDS fee" to Deutsche Bank.
2) If Greece pay back as agreed; JPMC gets fees and Deutsche Bank get principal and interest form Greece Government.
3) If Greece can not pay. Deutsche bank claim all their losses to JPMC and JPMC has to pay to Deutsche Bank. 


Now understanding credit default swaps, let's imagine on one fine day PIIGS and Finland default. Immediately creditors like Deutsche Bank / BNP Paribas will run to their CDS issuers (Who knows who they are but surely they are form Financial Big Bank community). We all know how healthy our banks are. Hence we will surely end up in situation where PIIGS country and "CDS issuer" both default. This Situation is called as "Double Default".


So summing up we are in situation where if We put governments as one community and Big Banks as other community. Big Banks are both Creditor and Insurance Provider to Governments. In this game with 1 default of country One bank will fail as CDS issuer and other as creditor (All 3 party lose). Remember in 2008 we learned that "Big Banks can not be allowed to fail" and that's exactly reason why "Greece is not allowed to fail" 


How long this "Not allowed" will be tolerated by Germany and other solvent nations is a million dollar question whose answer is tough. Irony of story again is money that government has is of common man's tax money and money that bank has is common man's saving. so in both cases common man is to lose either way. 


Comments / thoughts welcome.. 


P.S. : Ref : http://www2.isda.org/ 
" The market size for Credit Default Swaps more than doubled in size each year from $3.7 trillion in 2003. By the end of 2007, the CDS market had a notional value of $62.2 trillion. But notional amount fell during 2008 as a result of dealer "portfolio compression" efforts (replacing offsetting redundant contracts), and by the end of 2008 notional amount outstanding had fallen 38 percent to $38.6 trillion" 

A Brief History of IMF

Posted on : May, 18 2010


A brief History of IMF.

In order to understand IMF and it's role in global economics, we have to see roots of it. It’s a very interesting case study in itself. IMF was formed just before end of World War II in “Bretton Woods’s conference” and purpose was to "Engage nations in economic co-operations so that they don't get into wars and rather grow together".

In my opinion "IMF is one of the biggest success story of last century when it comes to organization that works to make nations work together". They formed and supported superb and robust foundation for international trade co-operation. Below chart can be a good proof that IMF was successful to a great extent in their vision.

War, Killings Pre and Post IMF.

Killings in War Year Wise 

Let’s see IMF and it’s Role in different eras.

Post WW II, : Global Economic Structure foundation. 1944 – 1971 (Formation of global platform with Gold Standard)

Primary goals in this era i.e. immediately post world war II were to

1)       Assist the reconstruction of the world's international payment system and

2)       “Stabilize exchange rates” those were very unstable in wartime.

3)       Provision for countries contributed to a pool, to borrow on a temporary basis, by countries with payment imbalances (All these transactions were happening in gold).

The IMF was extremely important in that era. It turned out to be a platform to establish, stabilize and support the global economic system.

It sounds odd today but there were Fixed Currency Conversion Rate between USD and other participating countries as per “Bretton Woods’s system” for 27 Years. If you see chart below it becomes very obvious. (In other words there were once a while re-valuation with IMF involvement but there was nothing like daily conversion rate.)

Currency	Code	2000	1990	1980	1970	1960	1950
Pound Sterling	GBP	0.6609	0.5632	0.4303	0.4167	0.3571	0.3564
Deutsche Mark	DEM	2.1272	1.6157	1.8177	3.6600	4.2	4.195
Indian Rupee	INR	44.942	17.505	7.8629	7.5	4.7619	4.7619
Japanese Yen	JPY	107.76	144.79	226.74	360	360	361.1
Swiss Franc	CHF	1.6888	1.3892	1.6757	4.373	4.373	4.373

Currency conversion in USD.

So the Structure was that All currencies were pegged to USD and USD was pegged to Gold as below.

Gold Pegging til 1971

Gold Pegging Structure.

Post Bretton Woods’s system : Another Era began in IMF’s history 1972–81. (No more Gold Discipline !  Print Money fast..)

On 15 August 1971 something happened that changed the world economic system dramatically.    United States declared that on “temporary” basis they are abandoning Gold Standard. (Expense of Vietnam War and Ambitious programs of president Nixon mainly drove this and even today it stands abandoned). This step was birth of “Floating Rate” currency system that we have even today. “None of the paper currencies today are backed by anything except faith on Governments and Central Banks.”

Though gold standard was abandoned and currencies started flowing freely, UDS -> INR went in range of 50 (on which whole outsourcing is based), IMF’s role still continued due to fact that it was well-established global balance of payment network. Also IMF had huge gold. Even today they posses 3,005.3 Tons of gold which they accumulated as interest payment (during gold standards), common pool contributions, etc..

So in this era of 1972 –1981, IMF started playing a role of Lender due to Oil Shocks. Also the IMF created a new concessional loan program called the Structural Adjustment Facility for poor countries.

Debt and painful reforms : 1982–89  (Money Supply Shrink ! Very high Interest Rates.)

In  order to control runaway inflation of 70s, Central Banks hiked interest rates in 80s. (e.g. Paul Volker hiked Interest Rate to 21% in US thereby allowing dollar to regain it’s value. This created debt crisis worldwide. IMF supported world even during this crisis by lending money. Though austerity measures took years for nations to come out of that crisis completely.

New political maps :  1990-2004 (The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union)

The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union kept IMF busy in developing economic structure for new countries that separated from formal Soviet Union. 

Also in this era IMF helped Indonesia, Korea in financial crisis. IMF started HIPC initiative to help poor countries as well.

Credit Crisis (2005 till date) Burst of Housing bubble.

This is nothing but today’s era and IMF has been busy in helping nations across globe e.g. Greece recently. It has responded to this crisis by tripling it’s lending capacity as well.

So, this is where we are in this whole financial history since WWII. Let’s see what someone write about IMF and world Financial History in 2030 how many new eras come and what they do in those.

Crucial Time.

Posted on : Apr, 27 2010

Dear All,

Coming days and weeks are very crucial. Germany has shown hesitance in bailing Greece out. Obviously it is keeping in mind that next candidates like Italy, Spain, Portugal, Ireland who will assume bailout if Greece is bailed out.

Now if Germany says No, I see 2 possibilities here one is IMF may still bail them out resulting is USD firming technically against EURO.

Another possibility is if Greece is allowed to fail. Well, this can again change rules of game. It can create massive short to mid term down tern in global equity markets.

Also in India RBI is speaking speaking and speaking about monitory tightening. If they really do so, time to come in short term will be tough, However if Greece is not bailed out and RBI does tightening it can obviate hyperinflation concerns in long term.

So let’s wait and watch.

P.S. Gold made all time high in EURO today in USD went up to 1170 if Greece fails we may see another All time High level in weeks to come.

PIIGS in line to collapse

Posted on : Feb, 20, 2010

Dear All,

This has been a week with events. G out of PIIGS cried this week. The term PIIGS stands for European Nations with Debt Crisis (Portugal, Ireland, Italy, Greece, Spain). So far it's easy for us to read the stories of this and even their Nationals are ok as there are Big Countries that can Bail out. Just Imagine who will be there to bail out if Big Nations go in debt crisis, which as we know is inevitable. Of course root causes are our false assumptions about Economy like.

1) More GDP better Growth.

2) More consumer confidence more Growth.

Anyways I will explain national Debt issue due to "Rolling up Debt" and more on terms above in coming updates as have really less bandwidth this week. However for those who can spend some time the Video below is really interesting one.

http://video.google.com/videoplay?docid=3915119166991168859#