World Politics News   Articles for World Politics Course

Apparently, 85% of the Greek bondholders have accepted the Greek offer of a reduction of about 70% of the value of the bonds.  The next step is for Greece to invoke what is know as a “collective action clause” which forces hold-out bondholders to accept the reduction in value.  If the clause is invoked, then the percentage of bondholders “accepting” the reduction will increase to about 95%.  The default, therefore will occur, but it will be an “orderly” default meaning that it not not necessarily trigger off a panic with respect to other countries in situations similar to Greece’s.

We will need to see if the ISDA will declare the default a “credit event.”  If it does, then the credit default swaps (the insurance policies against default) will be honored.  Such a determination will mean that some of the parties to the swaps will have to give up the collateral they had pledged as the “premium” for the insurance.  So some of the banks and hedge funds will lose some money.  How much money they lose depends upon how accurately they assessed the final value of the bonds after a default–a perfect assessment (30% + whatever value of the bonds Greece will offer as replacements for the defaulted bonds) would mean that the collateral would be worth exactly that amount.  We doubt that anyone predicted exactly the right value for the collateral, but it is possible that many of the issuers of the swaps could have come close.  The payout will be significantly less than the total amount of the defaulted bonds, but it may still be a hefty amount.

What is troubling is that the markets are now trying to figure out what the interest rates on the new Greek bonds (the ones that will be issued to pay the 30% of the old bonds that Greece has now defaulted upon).  Runors abound, and The Financial Times  says this:

“The new bonds that investors will receive on Monday have already started trading on the grey market and are quoted at yields of 17-22 per cent, a distressed level higher than any other country inside the eurozone.”

If accurate, the Greeks will very likely default again in the future.

Later in the day…….

The ISDA has in fact declared the default a “credit event” which means that the credit default swaps will be honored.  We will find out in a few days how much will be paid out.  At this time, I’m not sure if the counterparties to the swaps will be identified.  I’ll try to find out.

The South China Sea keeps bubbling.  The US and the Philippines have announced plans for a joint military exercise near disputed territory in the South China sea–a region with overlapping territorial claims by China, Vietnam, Malaysia, Brunei and Taiwan.  The exercise is scheduled for late April.  Keep tuned in.

A key official to the Assad regime has defected.  This defection is the first crack in the regime since the protests have started.  It is a hopeful sign, since most other options leading to the fall of the regime are problematic.  We can hope that Western powers are sending all sorts of signals to other Syrian officials welcoming similar moves.

India’s ruling Congress Party has suffered a series of major election setbacks in important states.  Increasingly, the chances for the election of the likely candidate for Prime Minster, Rahul Gandhi, in the 2014 general elections look shaky.  It also suggests increasing discontent with the process of pro-market reforms and the lingering discontent over the issue of corruption.

Fifteen percent of humans and chimp DNA is closer to that to gorillas than to each other, a new study finds.  I wonder which fifteen percent? (not a quiz post)

Just a brief update on the Greek debt situation.  It appears as if there are a number of holders of Greek debt who might refuse to accept the Greek offer of a 70% cut.  The bond holders include some Greek banks and pension funds who might refuse in order to trigger the credit default swaps they had previously purchased.  We will find out at 3 pm on Thursday what the final percentage of bondholders who will accept the deal actually is.  Here’s one version of what to expect (warning: Mish’s blog is extremely ideological but always fun to read)

We’ll be getting plenty of post-mortems on the Netanyahu-Obama meeting.  The analysis in the Los Angeles Times is fairly critical of Netanyahu, and talks explicitly about his role in the US political process.  It’s not clear how much of an issue this is to most Americans, but we’ll see as the days pass.

The Russians and the Chinese are beginning to change their positions on the situation in Syria ever so slightly.  I’m not sure that the movement is enough to give some hope to the Syrian people.  Even if a resolution is passed in the UN Security Council is passed, it is difficult to imagine what kind of intervention would actually offer real protection.  Senator McCain’s suggestion is virtually impossible to implement–only ground troops can offer real protection to the civilians.

Since all these posts are depressing, here’s a link to a little world politics humor.  (not a quiz post)  (just try to laugh)  And offer your own personal suggestions.

The quiz on Wednesday, 7 March, will be on the blog articles from 1-5 March, and the Oren excerpt, the Roosevelt and Truman letters, and the Holbrooke excerpt.  I strongly encourage everyone to at least skim the Report by the US Senate, but will not ask any questions about that reading.

One of the more interesting exercises in world politics is assessing the military capabilities of other states.  It is always a difficult one when one is assessing the budgets of states with different ways of accounting for different expenditures.  China has released its new military budget and this article from Business Week  goes over some of the imponderables in trying to assess how much of a threat China is to the rest of the world.

Iran held elections on Saturday, but the results are hard to interpret.  It doesn’t appear as if the results will force any major change in policies, but may in fact make it more difficult to get things done.  On the foreign policy issue of the nuclear program, it doesn’t seem as if it was a major issue.  As is the case with most elections, the state of the economy seems to have been the critical concern of the voters.

One hidden dimension of the violence in Syria is the role of climate change.  Most Americans believe that climate change is only a long-term threat, but this article suggests that the link between conflict and climate change is already happening and is real.

This post will not be on the American foreign policy quiz on 7 March.  It is provided only to supply background information on the Greek debt crisis that might be of interest to some of you.

I’ve done a little research on the International Swap and Derivatives Association to try to find out who serves on the committee that determines whether or not a “credit event” has occurred.  Here’s the list of the members of the “Determinations Committee” for the European region:  (for a full list of all the regional Determinations Committees, click here.)

Voting Dealers
Bank of America / Merrill Lynch
Barclays
BNP Paribas
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Societe Generale
UBS

Consultative Dealers
Citibank
The Royal Bank of Scotland

Voting Non-dealers
BlueMountain Capital (Second Term Non-dealer)
Citadel LLC(First Term Non-dealer)
D.E. Shaw Group (First Term Non-dealer)
Elliott Management Corporation (Third Term Non-dealer)
Pacific Investment Management Co., LLC (Second Term Non-dealer)

As you can see, the entities that make these decisions are all major financial institutions.  In some sense, that finding is logical–it is difficult to find people who understand all the intricacies of these complex agreements outside of the financial world.  On the other hand, this is clearly a case of the foxes guarding the hen house.  All of these financial institutions have interests in the outcomes of these decisions.  There is no way to determine whether these decisions are being made in the interests of the global world of finance as a whole or of the specific self interests of each of these financial institutions.

The ISDA membership is patterned after that of any private association or fraternity.  Only institutions that actually sell swaps and derivatives can apply for Primary Membership which is the only part of the ISDA that can cast a binding vote.  Each application is reviewed by the Board of Directors who are themselves all members of the ISDA.  The decision to make the votes public rests with the specific committees–the possibility of a decision to not publicize decisions can apparently be made, although I don’t know how one would even know about such decisions unless someone decided to leak information in contravention of the rules.  Here is a summary of the decision made on the Greek debt situation on 1 March.

The size of the credit derivatives market in mid-2008 was $54.6 trillion.   In short, a great deal of power is concentrated in the hands of a self-selected group that has the power to not even reveal its decisions.

The noted economist, William Nordhaus, has published an interesting essay in the New York Review of Books on the question of climate change.  It is a very detailed rebuttal of a group of 16 scinetists who published an article in the Wall Street Journal arguing that climate change is not something we need to worry about.  Nordhaus is very good at responding directly to the arguments made and his analysis is very sytematic and specific.

Jeffrey Goldberg of The Atlantic interviews President Obama on the Iranian nuclear situation.  The President is far more explicit in this interview on the matter than he has been in the past.  His views are considerably more hawkish than one might have assumed from his previous statements.  In the same issue, however, there are two articles that take a dim view of an attack on Iran:  one by James Fallows and the other by Robin Wright.

The International Swaps and Derivatives Association, a private organization which is the world’s supreme authority on a multi-trillion dollar market, has ruled that the Greek debt agreement was not a “credit event.”  This ruling means that all the investors who purchased credit default swaps (insurance policies) on their Greek bonds will not be paid for their losses (up to 70%) on their Greek bonds.  Many banks are breathing sighs of relief because it means that they will not have to pay for the losses the investors have experienced.  Other banks are gnashing their teeth because they bought the swaps precisely to cover their possible losses from such a default.  Theoretically, the gains and losses should equal zero (assuming that the premiums paid for the insurance were accurately determined to equal the possible losses–a very implausible assumption–someone always makes a mistake assessing the real risks).  It is safe to say that there will some losers.  Who they are and how much they lost is a very important question.  We won’t know for a few months (unless someone leaks the information sooner).  If you want to know more about the ISDA, here’s the link to their homepage.  Barry Ritholz, one of the most prominent and insightful of all the Wall street bloggers, has a right-on post about the ISDA.

How impatient are you when you surf the web?  The world has the attention span of a gerbil.  (Not a quiz link)

The public relations campaign on the possible bombing of Iran continues.  We’ll see if the New York Times publishes an opposing view any time soon.

How bad is it in Greece?  Check out this graph. (not a quiz link)

The Institute for Economics and Peace has published an extraordinary study entitled “ECONOMIC CONSEQUENCES of WAR on the U.S. ECONOMY.”  This is one of the very few studies I have ever seen that has gone beyond the usual framework of simply adding up standard military costs and standard defense revenues.  I recommend it highly.   (not a quiz link)

The North Korean government is making conciliatory gestures, and the US is reciprocating.  One should not interpret these moves as genuine–they are actually part of a pattern that has played out over the last 10 years.  But this step is occurring early in Kim Joung-eun’s regime, so perhaps there are some reasons to be a little more optimistic.

A very interesting chart from The Economist.  Apparently, the happiest people in the world live in some of the poorest countries.