EU Moral Hazard

"It's easy to get in. It's hard to get out."
--Gordon Gekko (Wall Street: Money Never Sleeps)

One does have to question how the recent 'controlled writedown' on Greek bonds coupled with the declaration that Greece has indeed defaulted will play out in subsequent EU country situations.

Why would anyone buy sovereign debt if bureaucrats can arbitrarily determine who gets paid and how much gets paid out in case of fiscal problems? Seemingly, borrowing costs should be on their way up.

There is also the ongoing question of ability to hedge. Yes, this time a credit event was declared but only after significant modifications to debt contracts. Next time, perhaps CDSs will be declared null and void (as was rumored in the Greek case).

Sovereign debt holders seeking to hedge risk will need to find another way to hedge. Otherwise, they will play smaller.

So far, however, we've seen the opposite. Sovereign credit spreads have been screaming tighter since LTRO operations commenced.

Once again, it appears that central bank intervention is dulling the risk assessment mechanism of sovereign debt holders. Why worry about risk of buying these bods if both sides of the trade will be made whole by the central banks?

Moral hazard as far as the eye can see.

position in SPX