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Non-Tech : Derivatives: Darth Vader's Revenge
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To: Paul Berliner who wrote (917)4/16/1999 5:07:00 PM
From: Henry Volquardsen  Read Replies (1) of 2794
 
Absolutely.

One point that refutes the conspiracy allegation is that Italian rates weren't the only interest rates that trended the same way prior to the creation of the Euro. Spanish and Portugese long rates also converged to German rates while the short term rates were even higher than Italian rates. Long term French rates went lower than German rates while short term rates were as much as 150 bp higher. There was no conspiracy.

Long Term Capital makes a convenient bogeyman for these types of conspiracy theory. But the entire market had the exact same trade on. I had the trade on. Anyone who saw the strength of the political will in Europe had the trade on. And it worked.

The article makes reference to the convergence rates being inappropriate and that this will result in Italian debt being subsidized by the rest of Europe. This is in fact true, imo. But it is not the result of a conspiracy between the Bank of Italy and LTCM. If there were a conspiracy it was among all the politicians of all the member states. The German government knows quite well that they, and the Dutch, Austrians and a few others might wind up underwriting the enormous Italian and Belgian debt loads as well as that of a few others. But it was a price they were very willing to pay for economic and eventual political union. I personally think it is a mistake and think the Euro has some major problems in the future. But the entire European political leadership went into this
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