Why I’m not running from a Greek default

Founder and Publisher of the Switzer Report
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Regular readers know I’m cautiously positive and I’m fully invested because I’m investing for the long-term; the potential unknown implications of the Greek ‘default’ have me concerned – but I’m not bailing out.

Today, European time, will be the first big test for the Greek bailout deal. There are a number reasons why I’m coping with the unknowns surrounding the Greek deal, and why those who insure against defaults on bonds via credit default swaps are not hopping mad that their insurance cover is not kicking in.

By the way, I’m a little confused why some experts say that a Greek default is imminent, but I’m comforted by the fact that the stock market is defying gravity, though that can’t last forever considering the great two months we have seen this year. I expect a sell-off, but you have to be impressed at the market’s reaction to China’s revelation that it had cut its growth target from 8% to 7.5%.

Greek default

But back to the default. Nick Parsons, the head of research at National Australia Bank, thinks the markets have become desensitised to all things Greek and default-related.

“Technically the default is inevitable. There is another meeting at 11 March and we expect it will be a default,” he said. “It might even ultimately lead to Greece’s exiting from European Union itself.”

“Many of the derivative contracts which had been written upon default have already expired. A year ago it might have proved a catastrophe. In two weeks very little will come of it. The market is prepared for this,” Mr Parsons explained.

I have to say, there are plenty of people bellyaching on the internet pondering why the International Swap and Derivative Association (ISDA) has said no to coughing up on the insurance to private creditors who have copped a €100 billion haircut to make Greece’s debt look manageable. Some say the ISDA thinks Greek bonds now have more credibility, but others says it has protected the banks who are supposed to pay up when a default happens. By not calling, the debt renegotiation saves the insurers but doesn’t help the so-called insured!

No fear

I’m worried that as this evening’s talks loom that maybe there is a derivatives storm that many have not seen on their market radar screens, but on the other hand, I do like the current market reaction, which is showing little panic. In recent weeks in the US, the VIX, or fear index, has been around 17-18, which is very low and indicates that the spook factor is not important right now.

One issue that has to be factored into your investment decisions is whether what goes on in Europe this week in relation to Greece could set up a ‘me too’ action where other PIIGS debtor countries – Portugal, Ireland, Italy and Spain – ask for easier debt terms and more bondholders end up with close-shave haircuts.

I’m relying on the smart guys of the world – the International Monetary Fund, the World Bank, the G20, the European Central Bank and possibly the European Union (though I have my doubts on the latter organisation after two years of stupidity) – to have already looked at the potential fallout from a derivatives problem linked to Greek sovereign debt, and that’s why markets aren’t very nervous.

But what about Lehman Brothers, you say? The smart guys missed that, including the ratings agencies, which are paid to rate financial organisations, so why won’t they miss it again?

My answer to this is that in 2008 the derivatives implications of the sub-prime mess were not front of mind, except for a few insiders who made money out of it. This time the whole financial and governmental world have to be focused on this.

If there was a risk, our own Reserve Bank of Australia (RBA) should be across it and interest rates should be 0.5% lower. The RBA’s relaxed stance on Europe and the fact it held rates steady this week makes me less scared about the unknown.

Of course, if a financial meltdown does a re-run in 2012 then the key people at the RBA should be shown the door for being incompetent.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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