Wednesday, May 5, 2010

Do we have a name for this?

Governments don’t go out of business. It may seem obvious and while they are subject to hostile takeovers, either by other countries or by rival internal factions, they simply are there. Now, to avoid losing ground to inside factions, Governments sometimes agree to things that they can’t afford. In fact, it might be fair to say that all Governments do that to some extent. They are hoping for two things when they do it, that the problem will not arise until after they have left office and hopefully, the economy will grow making the debt more affordable.
However, if you have a worldwide recession and if the financial industry decides that your potential ability to repay your debt has become questionable, they will demand higher interest rates on loans. Of course that makes the debt less affordable. Now let’s think about the consequences of this. If all other things were equal, there would be no one who would want Greece to default. The people who have borrowed from Greece certainly want to get paid; the Greek Government wants to continue operating and the world as a whole doesn’t need further economic turmoil.
However in our current financial situation where we have created many instruments that allow large investors to bet against Greece, suddenly we have players who want Greece to default. It would mean a big payout to them as they cashed in on the speculative instruments they purchased. In fact, they want it so much they are willing to share their views on how all the efforts to avoid Greek default are likely to fail. If you have taken short positions on Greek debt, the higher the interest rate goes the better. An actual default would be the best possible outcome.
Now, we saw this in the mortgage industry. As bad as some of the problems were, I have no doubt they were exacerbated by those who bet against housing. Similarly, when short sellers attacked the banking industry we saw fundamentally sound institutions suddenly in danger and in need of short term financing from the Government.
It is not like these bets against Greece, housing or you name it are harmless, the fact that they exist creates a force for, well evil, where they want to see a country or an industry destroyed. The motivation is purely greed but if they tried to destroy countries or institutions because of political motivation, we would know what to call them.

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