Event that Leads to a Panic

Brezhnev Bonds Haunt Putin as Investors Hunt $785 Billion – Bloomberg.

In my years of studying market panics, I have come to the conclusion that the market event that precipitates a panic is always an unexpected event away from the market. Allow me to explain.

Currently, everyone has their eyes on the PIIGS believing that one of these countries could default sending the market into a tailspin. I can guarantee that the default of Portugual, Ireland, Italy, Greece or Spain will most definitely not be the straw that breaks the camel’s back. The politicians, bureaucrats and bankers are fully aware of these risks and have deployed an impressive amount of cash to maintain the status quo.

The precipitating event will be like this recent court decision declaring $785bn in Russian debt an existing obligation. Theoretically, this decision could raise the Russian debt to GDP level from about 10% today to over 60%. This would wreak havoc with the markets. While the PIIGS situation was being addressed with gobs of liquidity, Russian bond prices would plummet causing the margin calls and withdrawal of credit that starts a market panic.

Don’t worry, because this is an unlikely scenario. There is another court decision from 1997 where tsarist debt was paid at about 2% on the dollar, and this is a more likely settlement outcome for this case.

This Russian situation is just an example of what can cause the next market panic. The politicians, bureaucrats and bankers are tending to the problems of which they are aware, but ultimately it will be a completely unanticipated event which will knock down the house of cards.

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One thought on “Event that Leads to a Panic

  1. Your observation here might prove prescient. The rumor that Bundesbank President Weidmann might be resigning on account of his sharp disagreement with Draghi over the ECB’s [illegal] bond buying plan (CNBC’s Sylvia Wadhwa has an insightful piece @ http://www.cnbc.com/id/48855861) has me thinking this “rumor” in fact could be a signal that the German constitutional court ruling on the ESM due in September could be the detonator knocking down the house of cards.

    Can you post a link to the recent court decision regarding Russian debt? I’d like to learn more about this and its implications.

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