$157 Billion Greek Bailout

This morning's Wall Street Journal speaks of a new $157 Billion Greek bailout: Greece Gets New Bailout as U.S. Nears Brink

An admission of defeat by all involved: ECB President Trichet was unable to avoid a "technical default"; German Chancellor Merkel was unable to avoid spending more of her frugal citizens' money.

The Dow went up over 1% yesterday, partly on this news, which at least showed some leadership by Europe, and brought some certainty.

On the other hand, there are a lot of questions:

What about Greece's primary deficit? The country is spending more than it takes in, even before it services its debt. On this basis, they will run through any and all bailout money that they receive (around 100 billion in 2010, over 150 billion in 2011 --quite a bit for a country with a GDP of around $310 billion). I wonder if major political reforms/purges will be needed in order to accomplish the necessary economic restructuring.

Suggestion number 1: stop worrying about Turkey. I understand that a part of the problem has been huge unnecessary military expenditures over the years, which I can only assume have been accepted by the population because of anti-Turkish paranoia. Maybe leadership in some sort of Eastern Mediterranean free trade zone would help Greece's economy.

Suggestion number 2: Sweep out the Greek political class, and put people who are not implicated in the current mess in charge. Dominique Strauss-Kahn should be available soon :)

Will the technical default cause CDS contracts to pay out? WSJ's Steven Fidler says "probably not", because the deal for private sector contributions is voluntary, then follows up by asking "What use is default insurance if there's a default and no payouts?" (see A Guide to the New Deal in Athens: How a 'Selective Default' Works)

If you ask me, Credit Default Swaps (CDS) should not be allowed. I cannot buy insurance against your house burning down, because I have no "insurable interest", and doing so would give me an incentive to set your house ablaze. The word "swap" in the CDS acronym is a fig leaf, just put there to allow lawmakers to pretend that they are not insurance, and can be used by financial institutions in an unregulated fashion. New regs are trying to change this, but the CDS market is still murky and opaque -- its been 8 years since Warren Buffet called these and other derivatives "financial weapons of mass destruction". A large part of what makes a Greek default so scary is that it is impossible to tell what exposures are out there, and what dominos will fall if Greece stops paying off.