From Peter Tchir of TF Market Advisors
The Evolution and Recycling of the Debt Crisis
Evolution:
2007 was the year of the individual. Largely sub-prime mortgages.
2008 saw the shift from the individual crisis to problems at the bank level
2009 started with banks in full crisis mode, but ended the year with a brief vacation from worrying about insurmountable debt
2010 saw the beginning of the sovereign debt crisis
2011 has seen the sovereign debt crisis spiral out of control, banks are back in the crisis mix and individuals are certainly not helping if not back in crisis mode. The feeling that this crisis is bigger and is snowballing is real, because it is. Neither banks nor individuals ever truly repaired their balance sheets fully and sovereigns across the global pillaged their balance sheets for incremental growth and votes.
2012 looks like it will be the year of the supra-national. It looks like any “solution” to this year’s crisis will be to push the problem up a level. Creation of new pan-European entities are being discussed while China and the IMF and now possibly Norway step up their support.
Mark Grant, amongst others, have seen the progression from individual to bank to sovereign an saw that each crisis would be bigger and harder to deal with. Now once again the plan is to push the risk up a level – to entities that either don’t exist (European fiscal union) or were bizarre entities no one outside of Emerging Markets cared about (IMF). What power these entities really have other than being a good way for individual countries to hide their risk remains to be seen. Since nothing is being actually fixed at the sovereign or the bank or individual level the next crisis will be bigger and uglier and sooner than ever.
All the evolution of the credit crisis is dis-prove the adage that cr@p rolls downhill, because clearly it flows uphill.
Recycling:
Clearly all “bad” ideas are good again. Enron perfected the Special Purpose Vehicle (SPV) and was a master of off balance sheet guarantees. Guarantees with their own equity as collateral in many cases.
SIV’s are SPV’s with leverage. The kind of “asset” that got Citi in huge trouble and almost took down the bank. SIV’s had a special place in CDO hell, but I guess you can’t keep a good idea down.
Detachable insurance. So the EFSF would sell insurance that would come with a new issue bond but could be detached and sold separately? If that doesn’t sound a lot like the evil enemy “CDS” than I don’t know what does. The biggest detractors of CDS always seem to say it is like buying fire insurance on your neighbor’s house. U never agreed with that analogy but this is definitely like buying fire insurance on a house that doesn’t cover you in event of fire.
The details will be interesting but they had better do as much with cash up front as possible because and ability to require cash in times of stress creates the contagion death spiral they are allegedly trying to prevent.
Clearly everyone “gets it” now. What “it” is and how much damage “getting it” will cause remains to be seen. I find it really hard to believe this is better than forcing a Greek default and restructuring or defaults at the weakest banks and other sovereigns and then getting Italy an Spain to clean up their act.
