October 24, 2011
The EU to try to solve a problem of too much leverage with even more leverage by issuing a sovereign CDO to solve a sovereign debt crisis. Now where we heard this before?
This all reminiscent of the role of AIG in the sub-prime debacle because its like issuing a sub-prime CDO to solve defaults in the sub-prime market.
The EU will provide a sliver of equity, like a leveraged CDO, and then borrow the money to try to convince us that weak countries, Spain and Italy are solvent. If we stop to think about what is going on, we see that we are leveraging the balance sheets of weak countries in order to convince ourselves that those very weakened balance sheets are actually getting stronger eventhough they will be now carrying more debt not less debt. Bizarre.