2010-03-17

Stronger CDS Regulation will trigger a U.S. dollar rally and global recession - 刘军洛

Liu Junluo has another blog out, this time on CDS regulation. Long story short is that CDS did not in fact cause the collapse of Lehman Brothers. Although the CDS on Lehman debt exceeded the debt of Lehman, this was not the problem. In the case of Greece, the CDS on Greek debt is worth only about 2% of the outstanding debt. However, what CDS do allow for is a lower cost of financing. Should Europe succeed in tightening or even banning CDS when the G20 meets in June, it will send the cost of sovereign debt higher just after the Greeks sell $30 billion worth of bonds in May. This will trigger a crisis, sending the U.S. dollar higher and the world into another recession, a la 2008.

Here's my translation. There are a few spots I was unsure of and they may be updated in future. A Chinese friend critiqued some parts of the previous translated article, but I hadn't heard from them on this one yet. With that caveat:

Stronger CDS regulation will cause a U.S. dollar rally and send the world into another recession (2010-03-11 22:45:36)

Recently, the Greece sovereign debt crisis has once again made "credit default swaps" (CDS) the world's star. Financial innovation is a clear symbol of high efficiency, a robust legal system and social responsibility. A credit default swap is a credit insurance contract. Just as today we can see shipping insurance, fire insurance, life insurance, etc., are the same protectors of civilization.

Credit default swaps were developed by J.P. Morgan in 1995. An insurance contract will give society great efficiency, but also the possibility for huge property losses. Such as if the future is really facing a serious rise in temperatures, then a large number of coastal property insurance companies will go bankrupt. Modern life requires: motor vehicle insurance, medical insurance, travel insurance and so on. However, many people are unaware of these unusually distant "credit default swap" derivatives, when in fact it is important for everyone.

Today, Chinese, Japanese and Africans can do nothing about the next U.S. presidential election. However, "credit default swaps" now control the future and property of everyone on the planet. Going back to 2008, the Lehman Brothers bankruptcy cost AIG 1.2 trillion dollars due to "credit default swap" contracts on Lehman Brothers subprime debt. By the end of 2007 Lehman Brothers "credit default swap" spreads on the firm's bonds were less than 100, but by October 2008 they reached 7000. Bad luck for AIG, which had sold the CDS on Lehman Brothers. When Lehman Brothers was alive, the size of its debt was 150 billion U.S. dollars. However, "credit default swap" contracts on Lehman Brothers debt reached as high as 400 billion U.S. dollars.

Now everybody who can see this will generally believe that these financial crazies are a group of pests. But these world famous vermin were the supporters of the global economy from 2001 to 2007. If there was no AIG to sell CDS on Lehman Brothers debt, the interest rates on subprime debt would have been extremely high and the pressure from the 2000 technology bubble would have been much greater. It's like popularizing aviation insurance, while promoting the development of the world's aviation industry. Now that the global aviation industry is mired in excess capacity and debt, we should not blame aviation insurance. U.S. subprime debt was an important financial innovation that successfully drove the 2001 - 2007 economy out of a downturn. American subprime debt promoted a huge wave of American consumer debt.

Now the question is if the world noticed that from 2001 to 2007 the world's two major surplus countries, Germany and China, had a non-stop decline in consumption relative to GDP. Therefore, at last the Americans can consume no more. Even more importantly, in the first half of 2007 the U.S. sub-prime market problems appeared, and in the second half of 2007 China's central bank and the European central bank undertook what they believed was the correct anti-inflationary policy.

The promotion of aviation insurance saves significant operating costs for the global aviation industry. Today the $60 trillion global "credit default swap" market saves the world's sovereign debt 300 billion to 500 billion dollars annually in interest costs. In early 2009, dear Mr. Bernanke bought $1.3 trillion worth of U.S. bonds as part of the quantitative easing policy, and ensured that the world's sovereign debt also increased by more than $12 trillion. Now perceptive people should be well aware that the global "credit default swap" market should be further scaled up quickly to provide a relaxed environment for the financing of sovereign debt in 2010 - 2011.

Unfortunately, Greece's economy has seen debt costs rise due to their problem with CDS. Greek bonds total $400 billion, while the outstanding Greek CDS total only $9 billion U.S. dollars. Therefore, only a small number of hedge fund funds can push up Greek CDS spreads, increasing the debt problems of Greece and then short the euro. Then someone might ask, wasn't an important factor in the Lehman Brothers bankruptcy the fact that Lehman Brothers CDS market grew too large? But consider the trend in China's stock market from October 2007 to October 2008, rarely has such a large decline been seen in world history. Therefore, the real killer of Lehman Brothers was the Chinese stock market.

Europe and Greece are keen to ban "naked buying" of sovereign CDS contracts. For today's global debt holders, this will be the disaster of the Century because the rising cost of risk in the global bond market will trigger a crash. A more serious problem is that in 2009, China's consumption as a percent of GDP hit a new low since the reform and opening up period, while in 2009 the Japanese economy in 2009 had the largest decrease in GDP since World War II and the average income also had the largest drop since World War II.

In May 2010, Greece will face nearly $30 billion of debt financing. And in June 2010 at the G20 meeting, EU and Greek officials hope to strengthen oversight of financial derivatives. In a couple of months we'll be in May and June, and if the U.S. dollar strongly appreciates, many people in the world will jump from tall buildings.


Liu Jun Luo
March 11, 2010

Here's the original and the link to the original, my English translation will be up soon.
加强CDS监管将让美元强烈上涨与世界进入再衰退
近日,希腊地区的主权债券问题,再次让“信用违约掉期”(CDS)这个金融衍生品成为世界明星。金融创新是一个社会高度效率、法律体系健全、社会责任明确的重要象征。“信用违约掉期”事实是一份金融资产信用保险合同。就像现在大家见到的船运保险、火灾保险、人寿保险等等一样,对社会文明体系是一种神圣的保护者。“信用违约掉期”是由摩根大通于1995年开发出来。一份保险合同会给社会带来巨大的效率,但也有可能为社会带了巨大的财产损失。诸如,未来世界真的面临气温严重上升,那大量沿海的城市资产保险公司会大量破产。现代人类的生活已完全离不开:汽车保单、医疗保单、旅行保单等等。 但离全球许多人意识非常遥远的“信用违约掉期”衍生品,事实是对于全球每个地区的所有人是至关重要的。

今天中国人、日本人、非洲人,都可以事不关己地关注下届美国大选的情况。然而“信用违约掉期”这个金融合同却已经是现在掌握着地球上每一个人的未来和财产。追溯到2008年,美国雷曼兄弟因次级债问题倒闭,而大量接受雷曼兄弟债券“信用违约掉期”合约AIG的1.2万亿美元牺牲了。2007年底雷曼兄弟债券“信用违约掉期”利差是100不到,到2008年10月是上升到7000,卖出雷曼兄弟债券“信用违约掉期”的AIG就这样倒霉的死了。雷曼兄弟活着的时候,其发行的债券规模是1500亿美元。而雷曼兄弟债券“信用违约掉期”合约后来是高达4000亿美元。现在大家看到这里普遍会认为,这些金融疯子什么都没干,是一群害虫。但正是这群世界意识的害虫却是全球经济在2001年——2007年的主要推动者。如果没有AIG为雷曼出售“信用违约掉期”保险,那雷曼兄弟向世界发售的次级债收益率就会非常高,那世界经济承受2000年网络泡沫破灭的压力就会非常大。就像航空保险大量推广,而推动了世界航空业的发展。现在世界航空业陷入全面过剩与债台高筑,那我们不应该去指责航空保险吧。美国次级债是推动2001年——2007年世界经济成功步出衰退的重要金融创新。美国次级债推动了美国巨大的欠债消费浪潮。现在问题是,如果全球能注意到2001年~2007年全球两个重要盈余国——德国和中国,在这段时期内不停下降的占GDP规模的消费数据的话。所以,美国人最后消费不起了。更重要的是,2007年上半年美国次级债市场出现问题时,2007年下半年中国央行与欧洲央行是在拼命进行这他们自以为非常正确的国内反通货膨胀政策。

航空业保险的推广,为全球航空业节约了重要的营运成本。而今天规模在60万亿美元以上的全球“信用违约掉期”市场,也为全球主权债务们每年节约了3千亿~5千亿美元成本。2009年初美国中央银行亲爱的伯南克先生的1万3千亿美元购买美国债券的量化货币政策,保障了全球主权债务们在2009年也增加了12万亿美元以上。现在敏感的人,应该非常明白,全球“信用违约掉期”市场应该迅速更进一步放大规模为2010年——2011年全球主权债务国家融资提供宽松环境。不幸的是,近期希腊经济因为CDS的问题而引发债务成本进一步上升。希腊国债市场规模4000亿美元,而希腊“信用违约掉期”市场才90亿美元。所以,对冲基金只要少量投入资金就可以炒高希腊“信用违约掉期”利差,而引发希腊债务问题,达到沽空欧元套利的模式。那有人会问,雷曼兄弟倒闭的重要因素不是雷曼“信用违约掉期”保险本金市场过大吗?但请打开中国股市2007年10月——2008年10月的走势图,全球历史都少见的大暴跌。所以,雷曼兄弟的真正杀手是中国股市。政客们都是利益平衡的高级动物。所以,欧洲与希腊是极力希望禁止“裸买”主权“信用违约掉期”合同。这对今天的全球债权持有人来说,将是一场世纪灾难。因为全球市场债券会为风险成本的上升而引发暴跌。更严重的问题是,2009年中国消费占GDP规模创改革开放以来新低,而日本经济2009年创二战以来GDP下跌幅度历史记录包括日本平均收入也创二战以来最大下降幅度。2010年5月,希腊将面对近300亿美元债务融资。而2010年6月,欧盟与希腊官员希望在届时的G20会议,加强金融衍生的监管,再过两个月就将进入2010年5月和6月,美元如果届时出现强劲上升,那世界许多人就要去跳楼了。


刘军洛
2010年3月11日

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