"The market seems to be pricing in an orderly Greek default or a
successful "firewall" around the potential instability. Are the unknowns really
all known?
The equities market is acting like we know Greece's default will be orderly and no threat to financial stability. It is also acting like we know the U.S. economy can grow smartly while Europe contracts in recession. Lastly, the high level of confidence exuded by market participants suggests we know central bank liquidity is endlessly supportive of equities.
What do we really know about the coming default of Greece? Whether we openly call it default or play semantic games with "voluntary haircuts," we know bondholders will absorb tremendous losses that are equivalent to default. We also suspect some bondholders will refuse to play nice and accept their voluntary haircuts. Beyond that, how much do we know about how this unprecedented situation will play out?
It may be a good time to unearth a famous statement about known knowns and unknown unknowns:
What we know is that the European Union is a model without easy historical precedent. Any predictions made about Greek default or the many financial and political machinations designed to "firewall" Greek default from the rest of the EU are speculations, as there are no good historical precedents to guide our guesswork. To say we "know the European Central Bank has this under control" is to claim knowledge of the unknowable.
We also know the derivatives market for credit default swaps (CDS) is not transparent, so no one can claim to know the risk levels in this market or the possible spillover effects should an "event" trigger instability.
Here is how frequent contributor Harun I. views the CDS market and Greece's impending default:
The equities market is acting like we know Greece's default will be orderly and no threat to financial stability. It is also acting like we know the U.S. economy can grow smartly while Europe contracts in recession. Lastly, the high level of confidence exuded by market participants suggests we know central bank liquidity is endlessly supportive of equities.
What do we really know about the coming default of Greece? Whether we openly call it default or play semantic games with "voluntary haircuts," we know bondholders will absorb tremendous losses that are equivalent to default. We also suspect some bondholders will refuse to play nice and accept their voluntary haircuts. Beyond that, how much do we know about how this unprecedented situation will play out?
It may be a good time to unearth a famous statement about known knowns and unknown unknowns:
Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know. (Donald Rumsfeld)
What we know is that the European Union is a model without easy historical precedent. Any predictions made about Greek default or the many financial and political machinations designed to "firewall" Greek default from the rest of the EU are speculations, as there are no good historical precedents to guide our guesswork. To say we "know the European Central Bank has this under control" is to claim knowledge of the unknowable.
We also know the derivatives market for credit default swaps (CDS) is not transparent, so no one can claim to know the risk levels in this market or the possible spillover effects should an "event" trigger instability.
Here is how frequent contributor Harun I. views the CDS market and Greece's impending default:
My contention regarding Greece has been that they cannot be allowed to default because of a tremendously leverage system. This contention remains unchanged.at http://www.zerohedge.com/news/guest-post-do-we-really-know-greeces-default-will-be-orderly
Below, the excerpt from KWN, indicates the problems confronting the system. Ten years ago Greece defaulting would not have been noticed but today, in a world where the CDS market has gone from $60 billion to over $600 trillion in a decade, and needs another $100 trillion in new debt over the next decade, Greece is a line drawn in the sand, apparently even if they burn it to the ground..."
