Editor's Note: This article has been updated to clarify some primary points.
The past three-year global economic fiasco has resulted in the masses collectively holding their breaths and clutching their wallets in a widespread panic; however, some individuals, such as investor Kyle Bass seem not to have suffered to quite the extent that many fearful people have.
The founder of hedge fund, Hayman Capital based out of Dallas, Texas saved up $10 million when he worked on Wall Street firms and then proceeded to gamble big against sub-prime mortgage bond markets prior to the crash in 2008.
Recognized as one of only 15 investors who placed sizeable bets on the floundering American economy, Bass believed then that the sub-prime market collapse was only a symptom of a larger problem masked by rich western governments. Since the "big bet" worked so well for him in the U.S., he’s now betting against European countries with the potential to increase his current holdings by up to 650 times if a default takes place.
Bass explained that presently, international regulators from the European Central Bank and EU, known as the “Troika” are working with Greece but that the "solution" they are working on isn't going to help the country avoid defalut.
“They are forcing Greece to almost internally default and figure out who they are going to pay, and who they are not going to pay,” Bass said.
When regulators first attempted to work with Greece more than a year ago, in return for buying Greek bonds, the nation was asked to dramatically cut its work force. For example, Greece was told to hire just one worker for every five state employees who left or retired. Since then that ratio has been modified to 1:10. This explains the civil unrest that is presently occurring in Greece - all in the name of satisfying the Troika's demands.
But when the Troika returned this year to confirm progress, regulators were discouraged to find that little progress had been made toward achieving their budgetary goals and deficit goals.
“Greece was taking in all this money and they were not adhering to the austerity plan,” Bass explained.
Bass says that in Greece, the total debts over the last decade has increased at 12 percent per year while real global GDP has grown at only 4 percent annually.
Bass explained that a primary reason for the worldwide financial trauma was “dodgy securities worth trillions” that nations took on.
In looking at the situation, Bass has become convinced that an economic crisis is on the horizon and he has begun buying ‘credit default swaps’ on European countries. This allows him to bet big against bond prices by using the leverage of the CDS.
Currently, Bass is betting against Greece, Portugal, Ireland, Switzerland, Italy and Spain.
“I believe that Germany and the balance of the Eurocrats will cause Greece to default within the euro zone first. The frictions associated with such an event will prove to be problematic and the usual benefits of a substantially weakening currency that would historically accrue to the country in default will not be available to Greece.”
While he cannot be certain, Bass is banking on Greece to default and expects Germany to pull of the EU and recapitalize their own banks.
Therefore, he bought Greek CDS's - basically betting against $1 million worth of bonds. Bass says that if Greece does indeed default, he would earn a return of approximately 70 percent on the trade.
Still, Bass admits: “There is no playbook for how the world will most likely deal with a cluster of sovereign debts… [believing] it will all read like fiction from here. The organizers and members of the EMU are desperate and have nowhere to turn. The circular references of the optical backstops [International Monetary Fund and European Union] are showing in broad daylight.”
Remember, you are in control your email alerts! You can receive alerts for more than 25 free research report alerts including: The “10.0” Report, The Insiders Report, ETF Leaders Report, and The Focus List.
