Europe & Greece

With reference to the current European Economic crisis! It is indeed like studying Rock & Roll in a school where Paul Mc Cartney is the principal. The House of Finance (The place where our GBS is Housed) has the who is who of the Euro Economic zone) is Indeed fortunate to have as its President Prof.Dr.Dr.Otamar Issing.But I was indeed surprised to read his rather 'honest' view on Greece on the FT a week or so ago.Otmar Issing, was one of the fathers of the euro, correctly states the principle on which the single currency was founded in that.

I am sure you will agree with me and thanks to the Excellent lectures we had from our Macro Courses of Prof H as well as the Fantastic book that we had for the course on the AS AD + IS LM + ...... all the other 'pretty' Models, that The 'Building' all of a sudden doesnt look strong. A fully fledged currency requires both a central bank and a Treasury(Refer to the Last Question of our Final Exam in Macro) . The Treasury does not collect money from its citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency.
The original construction of the euro postulated that members would abide by the limits set by Maastricht. But previous Greek governments violated those limits
The government of George Papandreou, elected last October with a mandate to clean house, revealed that the budget deficit reached 12.7 per cent in 2009, shocking the markets as well as its deep pocketed Profligate partners. The European authorities accepted a plan that would reduce the deficit gradually with a first instalment of 4 per cent, but markets said 'Naaaaaah'.

The risk premium on Greek government bonds continues to hover around 3 per cent, depriving Greece of much of the benefit of euro membership. If this continues, will there be a real danger that Greece may not be able to extricate itself from its predicament whatever it does ?
So Keeping this in mind is the bashing of Derivatives Traders(Ok I have a conflict of Interest here!)under the pretext that it is Indeed the derivaitves market namely the market in credit default swaps aggravating the whole situation ? (CDS They say is biased in favour of those who speculate on failure. Being long CDS, the risk automatically declines if they are wrong. This is the opposite of selling short stocks, where being wrong the risk automatically increases)

So now as a student not as a Derivatives trader I ask does Speculation in CDS drive the risk premium higher ? I would say no A well-organised eurobond market is the solution ! Ya Thats correct You need more Derivatives than what you have now !



Venkat


PS : I would really be curios to know Prof.H' Reaction to this Article of OI on this and the next time I bump onto him am just going to ask him!