- Under pressure to arrest the threat to the currency before markets opened and prevent contagion engulfing Portugal and Spain, EU finance ministers endorsed an 85 billion-euro ($115 billion) loan package on Sunday to help Dublin cover bad bank debts and bridge a huge budget deficit.
*a quick aside - who exactly is being bailed out here? Not so much "Ireland, Inc" but the bondholders. And who are the main bondholders? Banks. Even more incestuous is the banks being bailed out are many times headquartered in countries providing a good part of the bailout funds. See how circular it is?
Further, the 'temporary' (3 year) bailout fund, has now been made permanent. Viva Bailout Globe.
Perhaps more sad was a little mentioned 'loss' this weekend - that is the leader of some form of functioning free markets,
- ........ talk of private investors having to take losses, or "haircuts," on the value of sovereign bonds, helped drive Ireland over the cliff.
So these flightly investors who demand the taxpayers of the world make sure they never lose a penny by buying bonds in countries with high risk, stamped their feet. And it looks like Germany lost this weekend and now we will have a 'case by case' review post 2013. Granted that adds more uncertainty... but let's not let dogma get in the way of a good backstop.
- ....euro zone officials agreed that after 2013, bondholders could face losses in future bailouts, but only on a case by case basis, taking into account guidance from the International Monetary Fund and its experience in previous debt crises. This was a caveat that France had advocated as a way to calm investor anxiety.
- Berlin had wanted the automatic involvement of the private sector in sovereign debt defaults, while Paris preferred a more flexible system.
Translation - we are going to live under a mirage that private markets still matter. However, the private market is so trained on moral hazard (which Alan Greenspan let out of the genie bottle in the late 90s with the bailout of Long Term Capital Management), it refuses to parlay its dollars into any market it can now actually lose money.
So to review, in normal functioning markets risk has a price. In the golden world of bond investing every bond on earth seems to now be backstopped by a central bank or rescue authority. Hence everything is mispriced, because moral hazard runs through every vein of our 'free markets'. This mispricing is seen as "a sign the markets are functioning and all is well". You sitting there with your silly Etrade account are subject to risk. If however you were one of the globe's oligarchs you do not face such issues - everything is a one sided trade. Except after 2013. When Germany wanted a free market to actually exist ... but that was too extreme per the push back this weekend. Instead it looks like bondholders will still be taken care of because surely we know when the can is kicked to 2013 'case by case' will mean 'well we need to make an exception on this one... and that one... and that one too...".