The Greek Bailout – Two Sides Of The Coin

Posted on March 18, 2012 by victor.hatley

Last Thursday the International Monetary Fund (IMF) and the European Union (EU) announced a Greek bailout, a $171 billion affair that the IMF claimed Greece had earned in the last months by their attempts to skirt full blown bankruptcy. The investors were standing to lose more than $130 billion from the debt swap that had been initiated to ease off the public sector burdens.

Interview With The BOG Governor

With €50 billion set aside by the EU and IMF for the refunding of the banks, the Bank Of Greece’s governor, George Provopoulos said in an interview Saturday that “I believe that the available amount will not need to be fully exhausted,” then continued with “The recapitalization of the banks will be completed by September 2012.” He did state though that he expected that there would be mergers taking place in spite of the Alpha Bank’s planned shareholder meeting to discuss scrapping their merger with EFG Eurobank Ergasias, one of the largest Greek bank mergers in years.

Investors Worried Anyways

The governor is set to testify Monday at the Bank of Greece’s monetary report to discuss the banking system, the economic recovery, and the difficulties that they face in the near and mid-term future…a subject still considered up for debate. The IMF warned that the bailout would have to be managed very carefully and that it left little room for error, and that Greece was still “accident prone.” A sentiment that many investors are seemingly echoing. In the report released on Friday, the IMF staff wrote that the package relies on very ambitious privatization and fiscal goals. But, mainly n the bringing new life to the structural reforms. If policies fail, or fail to be implemented, then a second bail out could become necessary.

May Take Second Bailout

This is that part that has investors concerned. Investors worry that the bailout may not be enough, in spite of the governors statement. Investors worry that if the Greek plan goes off track that the EU may have to backstop the country’s liquidity while coming up with another plan to boost the Greek economy. As it stands now, they had to agree to massive further spending cuts in order to obtain the loans. The plan also calls for a move to private industry, away from the public enterprise, in order to make the economy more competitive globally.

ISDA Ends Speculation – CDS’s Activated

Posted on March 11, 2012 by admin

The debt restructuring in Greece will activate the payouts on the Credit Default Swaps, according o the International Swaps And Derivatives Association. This eases the speculations that have been prevalent that the restructuring may not set off the default swaps. The CDS’s were intended to be investor insurance policies, and the intent would have been nixed if this decisionhad not been made.

Robert Pickel, the association President said that as of today the CDS market worked, but in spite of this assurance, doubts linger as to the effectiveness of the instruments. Officials originally tried to model the restructuring to avoid just this activation…and concerns are that any future actions could stop the CDS’s from paying out.

Even though the restructuring has been in the planning for the last few weeks, the activation of the payout could only occur after legal moves had been made by Greece. Chief Risk Officer at Smith Breeden Associates said, “This is the right result, through a very circuitous path.”

A “Collective Action Clause” was applied by the Greek government, that they had inserted earlier, that would maximize the countries debt relief, and force the losses on the bondholders. This was the “Credit Event” that triggered the CDS’s. A decision that demonstrates the policy makers no longer fear the stresses on the financial system the payout could impose.

The Greek books presently show that there are in excess of $70 billion owed. But after accounts are settled, it is looking like the bill to be paid will only cost Greeks $3.2 billion. But that doesn’t put to rest all the matters. An auction has to be scheduled to set the price thartthe defaulted bonds will pay out. It’s still uncertain as to which bonds will be used though, and Monday.

All the old bonds will be replaced with new Greek bonds, and on Friday the derivatives association said that there could be a few of the old bonds to go in the auction, but that the new bonds would likely satisfy any requirements there may be. The auction was scheduled to be held on March 19th.

This isn’t the first time that CDS’s have been used either…back in 2008 Ecuador had to activate their default swaps, and in 2001 the Argentinean default brought about an activation in the swaps. Many investors were using the default swaps as a type of insurance against any possible losses that may incur on their Greek bonds, and a few were using the swaps and betting that a payout would occur.

Last year, policy makers asserted that a voluntary debt exchange would not have caused the payout, but this would have left investors holding a large bag of losses. The association defended the CDS’s saying that the voluntary restructure wouldn’t trigger any kind of payout, but “It all comes back to the contract,” the association President said and the investors all know that.

The Climb of Retail Forex

Posted on March 11, 2012 by admin

One of the amazing changes in the currency markets has been the recent accent of liquidity for retail investors over the past 10 years. The Forex markets have been actively traded by the investor community since the early 1980′s mainly existing on the institutional level amongst what was known as the money center banks.

History of Forex Trading

Banks and Investment banks provided liquidity in the currency markets to treasuries of corporations. These companies would need to hedge currency exposure for a number of reasons. Corporations needed to sell profits in local currency before bringing the funds back into their home currency. This process created a market which eventually lead into speculation.

Other clients initially to the currency desks where mutual funds who would also need to purchase and sell currency when transacting in foreign equities. The creating of currency desks at financial institutions, lead to the creating of Forex trading desks at hedge funds, where investors would initiate risk on the macro direction of the a currency pair.

Currency desks would make money by market making which is the process of buying on the bid, and selling on the offer. This spread over time would generate income, as the traders hedge the majority of their risks. A good market maker, would see market flow on both sides of the market, as well as, have the capability to always transact at the mid price.

Occasionally, market makers would take risk, if they believed the market would continue to go in the direction they purchased or sold. The concept of making markets to branched off into making markets in the retail space.

At first, large financial institutions such as Chase Manhattan Bank and Duetsche Bank created online facilities which allowed some of their retail clients to transact in the currency markets. This was for speculation as well as for hedging. Eventually the process spread to a number of ECN’s and brokers who were willing to offset retail risk, by taking opposing positions in the market place.

Retail Forex

The retail space is now littered with multitudes of brokers who are active in the currency market. The majority of these retail outfits are regulated entities. In the US, having regulation is a most, and most brokers have a separate regulated entity that transacts for US citizens.

Outside the US, regulations are less onerous, but the investor is less protected. Most brokers offer a platform that facilitates transactions as well as offer a number of tools to enhance trading returns. Some brokers offer education in the currency markets, as well as charting tools and back testing software.

Many of the better brokers offer investors a demonstration account. Within these types of accounts, investors can trade demo money, and trade the markets in the same style they would trade real capital. A demonstration account, gives investors the opportunity to trade the markets and get used to the volatility and movements associated with the forex markets. Additionally, a new trader can get comfortable with how markets are quoted and which currency is a home currency and which is the counter currency.

The demo account will also allow a trader to test their skills using charting and technical analysis tools. It is much easier to paper trade a market as opposed to trading a market in real time, when quick changes occur that are not expected. A demo account, will allow a new trader to feel the “fear and greed” associated with trading and find a system that fits their risk reward profile.

The retail space in the Forex market has created a world of online investments that is even broader than the Forex markets, including indexes and commodities, which has broaden trading throughout the globe.

Retail Forex traders will often use manage forex accounts so that they do not have to learn how to trade for themselves. These accounts are owned by the investor but the trades are directed by professional managers. The key for success with managed forex accounts is to choose a company which can produce solid evidence of their trading history.

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