Friday, July 8, 2011

There's A "Much More Ominous Problem" In Greece Than The Possibility Of Default

Greenlight's latest investor letter is out, via Zerohedge, and David Einhorn had much to say on the crisis in Greece, but kept his Ben Bernanke slamming relatively contained, and asked why S&P is waiting to downgrade the U.S.

So, firstly, Einhorn doesn't see how privatization of state assets in Greece will resolve the country's underlying insolvency issues. He believes the efforts so far "aren’t really designed to prevent what most people would recognize as a default or losses to bondholders. They are designed to hide a much more ominous problem."
That problem? A credit event that would "trigger the payout" on credit default swaps. French President Nicolas Sarkozy declared that there could not be a “credit event.” Why would Mr. Sarkozy do this? Perhaps the French banks have enormous exposure to sovereign credit events, and it might not be just a Greek default that they are worried about.

Likely, the real worry is that the first default will expose the fiction that sovereign debt is risk-free. If the authorities permit one default, their credibility to prevent additional defaults will be lost. No one knows just how much aggregate exposure to sovereign debt and CDS is hidden in the banking system, and no one is itching to find out….

Read more: http://www.businessinsider.com/david-einhorn-dumps-yahoo-greenlight-investor-letter-june-2011-7#ixzz1RWttsZWS

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