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    The Greek Bailout, the CDS Market, and the End of the World

    A not-so-funny thing happened on the way to the latest Greek bailout.

    The terms and conditions of the bond swap Greece agreed to before getting another handout constitutes a theoretical default - but not a technical default.

    That's not funny to CDS holders.

    Greece hasn't defaulted (so far), but some of the buyers of credit default swaps, basically insurance policies that pay off if there is a default, claim the terms and conditions of the bond swap constitutes a "credit event" or default.

    If it is, they want to get paid.

    While on the surface this looks like a fight over the definition of a default, underneath the technicalities, the future of credit default swaps and credit markets is at stake.

    In other words, the ongoing Greek tragedy is really becoming a global tragedy of epic proportions.

    The Next Act in the Greek Bailout?

    Here's the long and short of it.

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  • The Greek Bailout: Why I'm Mostly Bullish about the Eurozone Last week's news that Eurozone GDP declined by 0.3% in the fourth quarter of 2011 set all the usual pundits moaning about the inevitable decline of Europe.

    Even Andrew Roberts, a wonderful historian with whom I almost always agree, wrote in the Financial Times that "Europe's fire has gone out."

    Today, the markets may welcome the Greek bailout deal, but behind the scenes they still dread the fact it won't work.

    Meanwhile, hushed whispers are still being muttered about a Greek default as being "worse than Lehman."

    On this subject I am a firm contrarian.

    If Greece does default and is thrown out of the Eurozone, then I think Europe is actually due for a rebound - not a collapse.

    It's only if they decide to bail out Greece again that I would become less optimistic.

    If that is the case, they would be devoting hundreds of billions of taxpayer dollars (or euros, as it were) to propping up an inevitable failure. Even then, Greece is relatively small compared to the growth drivers in the Eurozone, which are strong.

    The Problem with the Greek Bailout

    What the Greek crisis has shown is that European leaders in Germany and Scandinavia have their heads properly screwed on, but they are not yet a majority of EU opinion.

    The EU bureaucracy simply gave in far too easily to Greece's first demand for a bailout, then suggested further bailouts for the entire Mediterranean littoral, all of which had over-expanded their governments on the back of low interest rates in the first decade of the euro.

    Now reality is returning rapidly to the discussion.

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