Derivatives: Darth Vader's Revenge Message Board

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Non-Tech : Derivatives: Darth Vader's Revenge

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To: Thomas M. who wrote (916)	4/16/1999 1:34:00 PM
From: Paul Berliner	Read Replies (2) of 2794

An interesting article but absolutely bogus, in my opinion. Arbs positioned themselves for the inevitable convergence in EU interest rates over a year before the Euro was to be launched. Italy obviously was a difficult case because the country would risk accelerating an already high inflation rate should they ease aggressively, but they wanted to be in the EU so they did it anyway. I fail to see how a decision to ease needed the financial backing of LTCM - and the largest cuts happened late in '98 after the Fed eased - the Italian Central bank cut 100 bps in Oct. and again 50 bps in early Dec. when the entire mass of EU central banks had the coordinated cut. The story is appealing but it just does'nt make any sense. If Brazil wanted to get its sky high rates down to 3%, it can simply announce that the new rate is 3% and the 35% notes outstanding would rally. Whether the brazil economy would experience hyperinflation and ultimate disaster is another story - which is why they can't ease that aggressively. But Italy simply gambled, and most peculiar of all, the Lira didn't dive amid the easing.

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