Everyone now clearly understands the issue... Except maybe the ECB

As I just reposted part of Friday's analysis of the consequences of the ECB Greek debt swap, the bottom line being no bond buyer anywhere in Europe is safe from having the rules changed in the middle of the game and now face losses on every and any European bond, which will in due course cost the ECB in a predictable twist of fate, an incalculable sum in trying to support yields as bond buyers walk off the playing field; I feel pretty good that I get it. I understand how this pocket change transaction the ECB conducted Friday may bring down the entire sovereign debt market in the Euro-zone and in the near future cause many more countries to fall victim to unsustainable yields which will cause them to seek ever increasing bailouts or more likely the end game will lead to many EU defaults.

Yesterday I outlined this, but this is a situation I have posted on many times when things were still theoretical, now they are real. As proof that my analysis wasn't misguided or hyperbole, here's an article which shows not only does the head of the world's largest bond fund, PIMCO, get it, so does everyone else who has taken the time to just educate themselves on the very basics. There's no need to be a bond guru or accountant or economist to understand what just happened and this article is proof of that. I find it ironic that the language and the understanding of the situation are so similar to what I have posted, that I could probably post it as one of my own articles and no one would know the difference.

Here's the article...

If you are wondering what this has to do with equities and the stock market as that's what we trade,  think back to what Lehman did to the global financial system and the stock market, now imagine that magnified (not only by comparison of the "Lehman Default" vs the consequences of the "Greek Default", but in terms of multiple EU nations facing default). This is no small matter for the bond market, for the global financial system and for our interests, the Stock Market.

Bill Gross of Pimco Agrees

In Friday's "Bonds In the News" post here's an excerpt of what I saw as the ramifications of the ECB bond swap:

"The ECB has swapped their Greek bonds for the new bonds, no write down, no CAC clauses. In essence, the 50 year old concept of eqaul treatment for creditors was just thrown out the window as PSI (Private Sector Involvement) will (if Greece gets the deal don on the terms that have been proposed) will take a 50-70% loss on their swap of old Greek bonds for new ones (depending on the coupon). What happened today is the ECB set a new precedent of two classes of bond holders, senior and subordinated and with that, the concept of equal treatment of creditors went the window. What may end up being the unintended consequence and come back around to bite the ECB is the fact that this was what bond holders were afraid of. Now any private bond holders (and we're not talking about grandpa and grandma, we're talking about hedge funds, banks, sovereign wealth funds, etc) know that the more bonds the ECB hold of any one of the PIIGS, the bigger their losses will be when Portugal renegotiates their debt, followed by Italy and Spain. This will almost certainly cause bond buyers to think twice about buying bonds that they now know they are likely to take huge losses on, which will leave the ECB as the only incremental buyer of debt in the Euro-zone and they may have trouble doing that on new issues unless the buyers receive explicit guarantees that the ECB will in effect conduct QE 2 and promise to buy the bonds from the private sector as the ECB can only mop up what is out there on the secondary markets, they can't buy new issuance just as the F_E_D is prohibited from buying at Treasury auctions."


Pimco's (the world's largest bond fund) Bill Gross tweeted today...