Default Threat Rises


Well it’s all happening very fast now. But let’s pause for a moment to reconsider what may have happened last week with Wall Street’s “trading glitch.” Is it possible that traders saw the cops beating protestors in the Streets and surmised this: No matter what deal European leaders come up with to bailout Greece, that deal isn’t going to fly on the streets of Athens. The Greek people will not feel obligated to keep the promises made by their politicians to the IMF. Greece is going to default on its debt.

If Greece goes then a lot of interesting things start to happen. But that is not the “narrative” being put out by the mainstream today. The official line today is that the $500 billion loan and lending package agreed to by European government is enough to roll over Greek debt, avoid a crisis, defend the euro, and put an end to the widening credit default swaps in the derivatives market.

The trouble for Europe is that Greek debt is the tip of the spear. The Greek’s must roll over $15.8 billion in debt this year and $31.3 billion next year. As Bill shows below, it’s hard to imagine Greece devoting a larger share of tax income to debt service while the economy shrinks. It won’t be politically tolerable.

But what about the $251 billion in Italian sovereign debt that matures this year? And the $76.5 billion Spanish debt? And the $17.9 billion in Portuguese debt? The €500 billion aid package is not enough to disguise the fact that Europe’s debts are larger than the Europe can repay without resorting to debt default or the alternative: massive money printing.

The bond market has figured this out. In Europe and North America, the cost of buying insurance against a bond default in corporate and sovereign debt. According to Bloomberg, “The Markit iTraxx Europe Index, linked to the bonds of 125 companies, soared 45 basis points to 133 basis points as of May 7, according to Markit Group Ltd. The Markit CDX North America Investment Grade Index, tied to 125 companies in the U.S. and Canada, jumped 26.6 basis points to 118.7.”

But did the action in the CDS market migrate to Australia? Well, according to Bloomberg this morning, the news of the big deal in Europe took some starch out of the widening CDS spreads here in Australia. “The cost of protecting Australian corporate bonds from non-payment fell the most in more than nine months, according to traders of credit-default swaps. The Markit iTraxx Australia index fell 15 basis points to 114.5 basis points as of 8:19 a.m. in Sydney, the biggest drop since July 21, according to prices from Nomura Holdings Inc. and CMA DataVision in New York.”

That would suggest some major easing of the tensions in credit markets. But we’d take that with a major grain of salt. One quotation and one chart from the weekend tell Australian investors nearly everything thing they need to know about the effect a European sovereign debt meltdown would have on Aussie stocks and financial institutions.

The quotations come from Eric Johnston at the Age. On Saturday he reported that, “Banks face a surge in wholesale financing costs as fears of contagion spread through global credit markets, with still-fresh memories of the funding squeeze during the global financial crisis not far behind. Some of the nation’s major banks were yesterday believed to be looking at measures to top up holdings of liquid assets as concerns about risk increased on European credit markets. While Australian and Canadian banks continue to have ready access to credit markets, longer-term debt was becoming harder to obtain, bank treasury sources said.”

Once again the link between solvency and liquidity rears its ugly head. Europe’s troubles migrate to Australian balance sheets. And you can see the final proof of the pudding in the chart below from CMA Market data. It shows that when anxiety peaked last Friday night, it was Aussie banks that showed the largest credit deterioration in terms of the increase on their CDS. In other words, the cost of insuring yourself against default in the bonds of these Aussie firms went way up late last week.

Aussie Banks Showing Largest Credit Deterioration

That doesn’t mean any of these firms are going to default. But it does mean bond market investors realise that a global capital crisis that begins in Europe has a massive affect on Australian banks. The effect is not so much on Aussie loan losses of European assets, although there is some exposure there. The effect is a liquidity crisis which forces banks to raise cash by selling assets.

The assumption domestically is that the banks won’t have any trouble finding money to borrow abroad. But it might be a lot more expensive. And that might lead to higher bank interest rates here and less borrowing. Oh and by the way, the CDS rates for the miners were up too, last week, thanks to RuddTax and concerns about a China slow down.

There’s a lot more to say. But we’re off to work on the May issue of Australian Wealth Gameplan. In the meantime, if you’re wondering what the end result of all the machinations in Europe are, it’s probably more money printing, which explains gold’s recent move. And because the biggest debt problem of all is in America, you can expect more of this too.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. If I were still living in the U.K, I would be refusing to pay my tax demands. Why? Because arguably the state is bankrupt, and as such I would claim to be required to be placed on their debtors list during a windup action. I would then demand to negotiate on a per creditor penny in the pound basis.
    Anything else would be to be throwing my money at a system that cannot pay its way, that is now supporting other countries that cannot pay their way, and generally allowing banks to suck the marrow out of my future tax liabilities without providing any servicable value.

    The ECB ws the last European barrier to collapse, and its’ defences have now been breached because the weaker constituent parts of the Euro Zone are bankrupt and unsustainable.

    This 750 Billion Euro fund plans to buy Sovereign national debt, but, because it is specifically forbidden from doing so, it will buy them second hand from the banks. That means the banks are now going to be sucking even more marrow from my future tax liabilities in order to complement the future tax liabilities of Greeks, Irish, Portugese, and Italians.

    So lets get that 750 Billion Euro’s or nearly 1 Trillion Aussie dollars into perspective. A little over 500 million people. 1 Billion constitutes 20 dollars each. 1 trillion is 2000 dollars for every living person within the EU borders, and that is just to keep 4 countries from crashing. And this in every country where tax receipts are less than national spending.

    More debt to cure the sickness of too much debt!

    If this does not cause hyper inflation then I am a monkey’s uncle.

  2. My arithmetic fails me, surely that must be 20,000 dollars per citizen.
    Irrespective of whether they have a job (due to age) or not.

  3. This is looking all too familiar, doesn’t it?

    I Fail to see how printing more euros is going to” defend the Euro currency”.

    Now we have two big elephants in the room (one from Europe and the other from the US). Both are called Debt that someone has to pay off. Then we have the Big Panda in the room, which is the looming Real Estate Crash in China.

    And nobody wants to to look any of them in the eye while our officials do a great impression of officer barbrady in South Park – Nothing to see here people, move on now. Carry on.

  4. Madjak:

    Don’t forget the 3 monkeys in Australia right now (hear no evil, see no evil, speak no evil), the evil being the real estate monster that is festering in the corner.

    Our crash will be upon us soon, that scares me more than what is happening in Greece but something tells me they will all converge to a centre point of pain?!

  5. madjack, they aren’t printing euros, they are printing usd’s. $500bn of them in US fed swap balance sheet expansion (that which they promised to shrink) plus IMF funds. fundamental to understanding this pantomine they call economics is the usd hegemon which by its uncapped leverage and now expeditionary bite into continental europe owns all asset market valuations. Debt rules! So we have USD leveraged sovereign made money pulling against USD leveraged bankster made CDS. Get the common factor?

    But remember Goldman doesn’t lose (1st quarter 2010 and not one day of trading loss) and we have USD leveraged CDS bets getting slaughtered in the market. Have they onsold them to mugs already? I don’t think so and I think the bailout and swaps money will fail and the empire and their Fed/treasury mates are just shaking down what they know in any case is a dead Fed balance sheet that they can’t hope to hang on the American taxpayer anyway without getting torched personally. Obama (the Eddie Murphy alter ego) and his marionette masters might think they will now be able to blame the Europeans (while Goldman again takes the trading win)? But they will get routed because they are fundamentally stupid. The Europeans will be forced to make the CDS bets illegal and unenforceable and tell Obama’s mates to go hang. I’m staying out of this thing that the bankster cretins call a market.

  6. Steve’s quote of the day

    “Steve has a horrible gut feeling that Uncle Swanny is going to distort the property market once again in tonights proceedings”

  7. “… hear no evil, see no evil, speak no evil, the evil being the real estate monster that is festering in the corner*… ”

    I resemble that remark!

    * But you’ll all be pleased to learn that the festering, occasioned by the matadors’ swords, has healed. My second has bustled me out of the corner and I’m back in the ring… :)

    Biker Pete
    May 11, 2010
  8. Your ring has a corner, BP?

  9. Why yes, but it’s Steven who has the horribubble gut feeling.
    Clear the decks… .

    Biker Pete
    May 11, 2010
  10. What’s that metronome I hear,
    Perhaps the end is drawing near
    You never hear the shot that takes you down
    Now your dreams a memory, and seems
    More true from far away
    Just like smoke that fades and makes no sound

    Out of time,
    So say goodbye
    What is yours, now it’s mine

    And I dream broken dreams, I make them come true
    I make them come true
    I make them for you

    Bad dreams come true, I make them for you
    Bad dreams come true, I make them for you
    Bad dreams come true, I make them for you
    Bad dreams come true, I make them for you

    I think this may end up being worse than I anticipated…. may have bought another 6 months but for what purpose…. none it looks like.

    May 11, 2010
  11. When I woke
    I woke in the breathless black
    Of the box.
    I heard: the earth
    Was opening over me. Clods
    Fluttered back
    To the shovel. The
    Dear box, with me the dear
    Departed, gently rose.
    The lid flew up and I
    Stood, feeling:
    Three bullets travel
    Out of my chest
    Into the rifles of soldiers, who
    Marched off, gasping
    Out of the air a song
    With calm firm steps

    Film Put in Backwards
    Gunter Kunert, 1965
    Translated from German

    Berlin Afternoon

    In summer under a cloudy sky
    in summer with a mild rain falling
    in summer in the coolness of old rooms
    in among old wallpapers freighted with visions:
    to lie there
    and listen to the trams
    clunk of wheels over gaps in the rails
    gallop of cabs
    staccato of hand-driven machines
    in blown-away back yards
    mortal play of vanished bodies
    pale in the pallor of secret beds
    hidden behind crumbling stucco
    behind the teeming scurf of old houses
    which one sudden afternoon unwreathed
    are carried away by dump trucks and cranes
    complete with their contents
    out of their existence into our memory
    where their transcience welcomed and wept for
    stops: in summer
    with a mild rain falling.

    —Translated from the German by Christopher Middleton

    (from Poesiealbum acht, 1968 / Warnung vor Spiegeln, 1970)

    Speculations about the Writing of Poems
    by the Writer of Poems

    Lest by some mishap
    the eternal fire of our transience
    blind professional readers’ eyes, poets plug
    the unusable hulks of their works
    with cultural putty, kneaded into
    tough lumps of enigmatic décor:
    purloined trouvailles
    from all the literary wastelands.

    reality trickle through, reddish and
    lymphatic mainly, malodorous, poems are
    of artificial stuff
    and more hermetic than bunker doors underground,
    open only for ruin, Pandora’s hoard,
    and more impenetrable
    than spy networks, the webs
    of pensionable spiders, bug officialdom, glamorized
    worms that seethe
    under the broken paving of law.

    to let the seed spill on the earth and the tone
    crumble or fade: silence
    would be
    a measurable frequency of undeclared
    clear and loud truth.

    But the never enough is better:
    of plain material, short in measure, vessel
    for a small flame, illuminating
    little of its world, yet little is more than nothing.
    To say the right thing is more
    than correctness.
    To disturb for the good
    infinity of a second those
    perpetual busybodies laboring
    at their own hubris.
    To know of the future, that dark mountain,
    that a door to the treasure opens, if

    one speaks the magic word: to speak this
    one word with all the others
    is better than every best thing.

    —Translated from the German by Christopher Middleton

    (from Warnung vor Spiegeln, 1970)

    Translation of a German Proverb into Historical Kinetics

    Before you enter, clean your tongue!
    The landlord suffers from sensitive ears,
    unlike his lodgers, the obligatory ones,
    whose trouble is feeling (or whatever they call it).

    Don’t mention rope makers, or sisal,
    no hemp taboo, whose days are gone,
    whose days perish—nevertheless you are asked
    and tempestuously told:
    Not to speak of it, one just doesn’t speak
    of it,
    don’t do it, because one simply doesn’t, therefore:
    one may be one: ideal, to all attainable.

    But those who have not held their tongues enough
    are hung
    from that which is unspoken by the unspeakable one.

    —Translated from the German by Christopher Middleton

    The Hush

    It is nearly autumn
    when nightfall guarantees
    her appearance. The old time traveler
    from the beginning of the world,
    insubstantial. She leaves
    her face in the lamp shadow
    or has none. She trades
    in a drug that makes me
    avoid the reality
    I am not in. Sometimes
    she even announces her presence
    by the rustling of wallpaper,
    by a sigh
    the sleeping cat heaves,
    by, suddenly perceptible,
    a heartbeat
    that leaves me wondering
    where it came from.

    —Translated from the German by Christopher Middleton

    (from Unterwegs nach Utopia, 1977)

    From the Background of a Breughel

    The ancient house
    in the pictures of distance,
    forever surrounding:

    so the heavens talk to it,
    trees and bushes
    long ago came and keep
    company with it—
    the wild grape vine
    belts and circles
    rooms of sleep,
    dark stripes of staircase
    the kitchen midpoint
    lit by a log and eyes
    of cats

    Not even crows
    ruffle your flesh,
    here it is, no longer
    waiting, it is your blood
    feeds the beams and the tiles,
    the rain has wet your skin
    for centuries, or only
    as long as you are looking

    —Translated from the German by Christopher Middleton

    (from Abtötungsverfahren, 1980)

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    Film Put in Backwards Gunter Kunert

    Biker Pete
    May 11, 2010
  12. This one doing the rounds at the moment. I like it when these things are updated and Australianised :)

    “Over five thousand years ago, Moses said to the children of Israel ”
    pick up your shovel, mount your asses and camels, and I will lead you
    to the promised land”.

    40 years ago, Whitlam said, ” Lay down your shovels, sit on
    your asses, and light up a camel, this is the promised land”.

    Now Krudd has stolen your shovel, taxed your asses, raised the price
    of camels and mortgaged the promised land!”

  13. And Swanny will mount your ass, tax your Camels, and promise relief on your mortgage…


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