Obi-Wan Kenobi
/ 178.36.47.* / 2010-05-26 11:49
The second clause is particularly troubling: since most European countries will soon see massive hits to their GDP, resulting in inevitable spikes in borrowing costs, this becomes yet another example of a game theory arrangement where the benefit to the first defector is far greater than any dowside, with the last to defect left holding the bag on what would basically become a bail out of all of Europe. Many have wondered how arguably intelligent people could come up with a rescue package of Greece in which Greece itself is supposed to contribute to its own bailout. Now we know that this was the ploy all along. The second Portugal, Spain and Italy are dragged under by the vigilantes, their participation in the $1 trillion bailout ends. And when that happens, the full cost of the bailout will be borne by none other than the "richest" member of the IMF, the United States. Obviously, the incentive to blow up one's borrowing costs in this arrangement are huge, now that both Germany and the US have no choice but to bail out each and every dropping domino. Which is why we are confident that in the very short term we will see credit spreads of the PIIGS blowing out yet again, and in the medium-term, some diligent reporter will get an anonymous tip that the biggest buyers of Spanish CDS are Santander and BBVA, the biggest buyers of Italy CDS are UniCredit and Intesa SanPaolo, the biggest buyers of UK CDS is Barclays (RBS still has to figure out how to sell its Greek bonds, let alone how to trade CDS), etc.