So who are they protecting, the answer is simple; the bond holders.  Roughly, 80% of this debt is foreign owned and a large portion of this is held by German and French Citizens. Bottom line this rescue package is not for Greece, but it’s a rescue for Greek bond holders worldwide.  If Greece were to default tomorrow, it would not disappear, but its debt holders would be seriously hurt. Thus behind all this noise one must understand that the main reason for the bailout is to protect the bondholders; the exact same story unfolded in the US, the only difference being that it was a bailout of the banking industry.  As the Germans and French hold a very large percentage of these bonds, it is actually a bailout of Germany and France and not really Greece.  They should let Greece's default but they will not.

Even though Argentina defaulted on its debt, it is still around. Yes it did pay the price initially by being shut out of the global capital markets for years, but it did not vanish and only its foreign debt holders lost.

An IMF study by Eduardo Borensztein and Ugo Panizza counts as many as 257 sovereign defaults between 1824 and 2004. Between 1981 and 1990 alone, there were 74 defaults . In fact, the evidence suggests that the penalties for default are often less severe than those meted out to Argentina. Its experience of being shunned by international capital markets is not typical, for example. At least in recent years defaulters have been able to re-enter markets once debt restructuring is complete. Argentina’s woes stem partly from the fact that it is only now, more than eight years since it defaulted, nearing a final deal with its creditors

That said, markets appear to have short memories. Only the most recent defaults matter and the effects on spreads are short-lived. Messrs Borensztein and Panizza find that credit ratings between 1999 and 2002 were affected only by defaults since 1995. They find that defaults have no significant effect on bond spreads after the second year. This tallies with earlier research by Barry Eichengreen and Richard Portes. Studying bonds issued in the 1920s, they also found that recent defaults resulted in higher spreads but more distant ones had no effect.. Full story

This clearly illustrates that a Greek default would not be the end of the world and could potentially be a positive development over the long run; we stated this in our previous article Full story

It appears that the main reason behind the bailout is to placate the debt holders; these chaps should have known better. After all they did not complain when they were getting paid, now that the house might burn, they start to scream.  They knew well in advance that the situation was not sustainable, but yet they continued to purchase Greek debt. When you invest you understand that you are taking on some risk and the higher the yield the more risk you take. Investors that put money into a company that declares bankruptcy are not suddenly bailed out, they have to suck up and bear the losses. The same rules should apply to bond holders.

This concern over Greek debt is a simple ploy to cover up this fact; the same ploy was used by the US government to bail out the banks. If Greece defaults, we doubt the end of the world scenario that many are projecting will come to fruition. It will certainly cause some pain but will not have any lasting impact on the global markets.

The best hedge in the years to come against what appears to be another massive currency crisis will be to place a portion of one's money in commodities (Oil, Natural gas, Precious metals, base metals, etc.). ETF traders have a wide range of choice when it comes to taking a position in the commodity’s sector; USO, FCG, GDX, GLD, COPX, PALL, SLV, MOO, CUT, etc. However, the best option is to own the physical commodity and in this sense Gold, Silver and Palladium rank very high, as they are extremely easy to purchase and store.   Warning signs are being issued left right and centre and we hope those who have not taken heed finally decide to wake up and at the very least place a small amount of money into precious metals.  View this not as investment but as an insurance policy; it could just turn out to be the best investment you ever made.

Bad is never good until worse happens.

Danish proverb

-- Posted Tuesday, 4 May 2010 | Digg This Article