Parsing the Fed: Pass the Ouzo

I sat next to some pretty good Fed watchers at Merrill Lynch Capital Markets, and so I couldn't resist taking up my magnifying glass today, reading Louise Story's report in the New York Times. Fed Chairman Bernanke says "a disorderly default in one of those countries would no doubt roil financial markets globally." This seems like either big news or a faux pas.

Most of the press talk from the IMF, the ECB, global banks and rating agencies takes the position that any sovereign issuer default, by Greece, Ireland, Spain, or Italy, would be verboten because of the potential contagion. What Chairman Bernanke's statement says to me is that there is such a thing as an "orderly default," and that such orderly default would not roil financial markets globally. If he and others believe that, then there must be more going on behind the scenes than is public.

He continues, "It (a disorderly default) would have a big impact on credit spreads, on stock prices, and so on. ...I think the effects in the United States would be quite significant." Please hold that coffee, and get me an ouzo!

Echoing sentiments from our last post, Christopher Whalen of Institutional Risk Analyst characterizes the recent European deal announcement as "ridiculous." We then return to the world of derivatives markets, and we find Darrell Duffie of Stanford University opining that regulators "may not have adequately studied what contagion might occur among swaps holders, in the case of a Greek default." (quotation from NYT paraphrasing Duffie) Like the last crisis, it appears that we've learned nothing, and again no one seems to know what's at the end of the burning fuse.

Someone needs to come clean on this. The European Central Bank's statement that " This is much too sensitive...for us to have a conversation.." is totally inappropriate. Until then, our markets will be under downward pressure, as they are yesterday and today.