On the IMF bailouts, Greek defaults and Canadian household debts

Below is the link to my latest appearance on BNN with Howard Green and Ryan Avent.

Quick thoughts:

Credit Writedowns was one of the first English-language sources to report that the IMF was in the picture regarding funding a European bailout. My view has always been that this is just a backup plan and is not going to be considered a primary plan.

From early December:

The talk of the IMF as a lender of last resort for sovereigns continues. I continue to see any imminent real IMF involvement as unlikely. The IMF simply does not have the funds to bailout large developed economies, nor is that their mission. Politics in the US would rule out any solution that required the US to contribute to the IMF to help bailout Spain or Italy. If any IMF-oriented solution comes into being, the IMF would only be used as a fig leaf, and the true paymaster would be the ECB.

Yves Smith is right when she says that an IMF solution is just a precaution on both a political and practical level.

Ultimately, Greece will default. They are working out the terms now. But let’s be clear, investors will receive less than half of their investment back in net present value. The Europeans are trying to craft a proposal that isn’t a technical default. But, let’s get serious, calling a haircut of 50-60 or 70% a non-default is a joke. Moreover, as I said in November, the Greek non-default deal not is running smoothly and it’s exactly because Europe has eviscerated the sovereign CDS market by taking this approach. In any event, Spain and Italy are where the rubber meets the road.

Also note that our talk covered a little ground at the end regarding the Canadian housing market. The previous guest went into a lot greater detail here. But the gist of the problem is that Canadian households have a larger debt burden relative to the size of the domestic economy than American households did when the Americans’ property bubble burst. Moreover, policy space in Canada is limited as the policy rate is 1%. And the global economy is decelerating right now to boot.

Videos Part 1 and Part 2 here

  1. Anonymous says

    Greek CDS have not been eviscerated.  The CDS market continues to operate as usual.  Greek CDS trade in the 70’s, exactly where they ought to be trading.  They will be paid.  

    Any questions?

  2. Anonymous says

    The problem is that to have enough of a debt write off for Greece from the private sector without writing a cent of ECB held debt, to a level that is sustainable for Greece will need a bigger than 70% write off from private bond holders. I suspect that it will be dealt with in tranches and will end up with even greater losses. Unless all bond holders including ECB accept much higher write-offs, then Greece will be stuck in a deflationary spiral that will only end badly. 

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