FT did a great story with John Paulson famous for his greatest trade ever during the subprime crisis.
http://www.ft.com/intl/cms/s/0/43c76028-2645-11e1-9ed3-00144feabdc0.html#axzz1gZuIJPG0
The writer makes an interesting point in having the ECB act as the bond-insurer of last resort. Of course this is not without its problems:
1) Demand for insured sovereign debt would likely be greater than currently, but nevertheless probably not going to attract many foreign investors now as the prospect for the euro declining significantly over the next couple years is very likely. This is a big reason why the EFSF is having trouble attracting foreign investors.
2) Italy is in recession, with a debt to GDP of 120% and likely to grow to 130% by this time next year. There are no growth initiatives in Italy. Austerity will have its effects, but looking at Greece, these are likely to be mostly negative in terms of deficits and growth. With that immediate outlook in mind, there is a significant and growing risk that Italy will have to restructure its debt, leaving the ECB to absorb all the losses under this proposal.
3) Why would the ECB charge 1% to insure Italian debt, when market rates are currently around 5%?
4) It is unclear whether the ECB, according to its laws and mandates, can undertake the role of insuring euro zone sovereign bonds.
5) There remains the moral hazard of providing steeply discounted insurance to the periphery, where austerity measures are politically hazardous to say the least, and may not be completed should the bond market pressure ease. Thus increasing the likelihood of losses for the ECB.
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take advantage of leverage with them many went belly up and some made fortunes out of them.
