The problem with these insane contract arrangements is that they can be triggered by any significant down turn, not just by a major default. A down grade in a credit agency’s rating of a bank or a nation state will do it. They’re all done in secret, so we have no real idea what the risk really is It was a cascade of derivative failures tied to consumer debt, mostly home mortgages, that brought us within a hair’s breadth of ending civilization in 2008.
About 15% of Greek debt is held by investors not covered by Greek law, and they can’t be forced to accept the “voluntary” haircut. CDOs are a type of derivative and there are many hundreds of trillions worth of these contracts in existence for all manner of things. The question is whether a Greek default would set off enough of these financial WMD to create an unstoppable chain reaction.
It was only the printing of trillions of USDs by the Fed that kept things going through the crisis, but we have no way of knowing if that will work a second time or not. At least this time around we have President that doesn’t need to have the briefing books read to him while he colors the pictures. Unfortunately, it’s not clear if the people writing the briefs really know what they are talking about. They have had three years to figure it out, and the Dodd-Frank Act gave them authority to do something about it. However, the Republicans in Congress have refused to fund these activities, so we could be looking at the conflagration of all time, but the fire trucks are all up on blocks.
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