How is Greece going to resolve debt burden with exit from euro zone?

The approaching 17^th of June is remarkable for Greek elections. After the failure to form a coalition government for the third time Karolos Papoulias, a president of Greece dissolved a newly elected parliament with a strong opposition for bailout policies. The political party Syriza led by Alexis Tsipras obtained the second largest amount of seats in the 300-member parliament with pledges to overturn the austerity measures. So what are Greek solutions to resolve debt burden?

Opened debates about Greece exit from euro zone prompted euro zone’s experts to prepare contingency plans even though European leaders at the informal EC dinner held on 23 May, 2012 declared their desire to keep Greece in euro area and respect for its commitments. Moreover, it was ensured that growth and job creation in Greece would be supported through mobilised European structural funds and other instruments.

However, if Greek political leaders decide to leave euro zone, how Greece will exchange euro to drachma? Do Greeks really believe that if, according to the statistical data of Aggregated Balance Sheet of Monetary Financial Institutions (MFIs) of Greece for the end of March 2012[1], the €23,233 million banknotes and coins in circulation as well as the €179,668 million domestic deposits and repos of non Monetary financial institutions had been exchanged to drachma, Greece would has been able to repay €145,637 million outstanding liabilities to Credit Institutions of euro area and other countries, and cover remaining liabilities worth of  €95,178 million?

[1] Bank of Greece. Monetary and Banking Statistics http://www.bankofgreece.gr/Pages/en/Statistics/monetary/default.aspx

What is missing in management of portfolio of credits?

The JPMorgan Chase & Co. announced $2 billion trading loss on credit derivatives on Thursday, 10 May. Financial institutions use sophisticated financial modelling methodologies those involve estimation of the market price of the derivatives, the derivatives impact on the institutions’ balance sheet and macroeconomic indicators to forecast trends and values of financial products. So what is still missing in management of portfolio of credits?

Credit derivatives are used in risk management to mitigate pressure on institutions' balance sheets. Derivatives help to manage differences in asset classes, maturities, rating categories and debt seniority levels. Thus, it might seem that once credit derivatives separate ownership of assets from the management of credit risk, the clients’ relationship management become more significant than due diligence and estimation of credit risk. However, derivatives transfer but not eliminate risks.

So if risks are determined through probability distributions the following consideration might be quite important. Widely used risk management systems or attempts to find a universal solution - standardized risk management methodologies narrow selection of possible decisions and transform firm specific risks associated with company’s unique decision making into the systematic risks those affect the overall industry.

Systematic risks are created once the majority uses the same risk management techniques – similar credit derivatives solutions, thus further losses are coming up.