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Quick refresher on how short selling works. Shorts borrow a share, sell it immediately, then if the bet pays off they later buy it back at a lower price, pocket the difference and return the share to the person they borrowed it from.
Naked short selling is when an investor essentially shorts a stock that he hasn’t actually borrowed. During the worst of the financial crisis some corporate executives blamed the tactic for their companies’ plunging stock prices. In the U.S., regulators put new temporary rules in place to curb the practice in the fall of 2008. That rule was made permanent in July 2009.
Why is a naked CDS different from a naked short sale of bonds and stocks?
Buying a credit default swap in effect buys insurance against the risk of a default by either a company or country. This is essentially a short sale, since the holder profits from the contract if the entity does default. Even before that happens, the CDS holder benefits if the outlook for the entity deteriorates, because the insurance premium for that default risk will rise and the holder can profit by selling the insurance and closing out their trade.
Some investors holding debt issued by an entity buy credit insurance to protect their portfolios from such a risk, but most buying comes from investors who simply want to express a negative bet. As such, buying credit protection without owning any of the entity’s debt is a “naked” short bet. source
After Greece, Portugal and Spain suffered rating downgrades in April due to escalating fiscal problems, investors ask if the same standards are being applied to advanced economies.
While there is a broad agreement among investors that credit rating agencies were justified in downgrading peripheral European sovereigns last month, investors are questioning why advanced economies such as the UK, the US and Japan – which face mounting fiscal problems of their own – have managed to retain their triple-A ratings.
According to the International Monetary Fund, US debt-to-GDP is predicted to hit 109.7% in 2015, up from 83.2% at the end of last year. Over the same period, the UK’s debt ratio is expected to increase from 68.2% to 90.6%; while Japan’s debt burden is forecast to reach 248.8% in 2015, up from 217.6% at the end of 2009.
“The rating agencies haven't been consistent and some countries have been singled out more than others,” says Achilles Risvas, a managing partner at Dromeus Capital in Geneva.
The thought that Spain could default on its debt and require a bailout from fellow EU members -- a course of action Greece is currently considering -- is not going over well in Madrid. In February, Infrastructure Minister José Blanco blamed an "international conspiracy" to damage Spain via "apocalyptic editorials in foreign media." Indeed, around the same time, daily newspaper El País reported that the country's intelligence service was investigating the motives for "speculative attacks" on Spain's economy in the English-language press. source
On the 27th of May, the Financial Times published a story without mentioning a source suggesting that China was planning to change it's investment policy regarding Europe by selling its Greek, Portugese and Spanish bonds. Result: the Euro plumped instantly. China quickly reacted and denied it. The Financial Times made no move to rectify the report.
The euro is being deliberately destroyed! Namely by speculators who collude with the media, and the Financial Times is one of the culprits. No, you are not a conspiracy site, but you read the summary of a message in a quality newspaper that was published the other day . The Spanish Minister Jose Blanco said he's strongly convinced in a conspiracy to discredit his country. According to author, entrepreneur, financial reporter Willem Middelkoop, the Financial Times plays a remarkable role indeed.
Mr. Middelkoop, do you believe in the conspiracy?
"Spain have an interest in keeping up appearances. On the other hand, huge interest from England play a role in putting the focus on Spain, in an attempt to make the financial problems across the Channel to be forgotten. "
But the Financial Times is part of the plot?
"We have often seen that the FT's carries its own activist agenda. Years ago, the newspapers was already very anti-Duisenberg and anti-Euro. The newspaper was years ago, has always been very anti-Duisenberg and anti-euro. While the Wall Street Journal is the "club paper" of Wall Street banks, the FT is the "club paper" of the City and they find it very nice when there are problems in Euroland. "
Why do they laugh at the euro countries?
"The problems in Greece and Spain are nothing compared to the financial problems in the United States, Japan and Britain. Wait until it really goes wrong. "
Do you think that will happen then?
"You can wait for it."
You predicted that after the banks, countries will fall.
"Almost all states except China are threatened to go bankrupt. And of course Russia, which has gone bankrupt three times in the last one hundred years alone. "
But what does the situation look like?
"Greece has a national debt of 50 billion. In England, 200 billion was created out of thin air in a few months to cover the budget deficits, but they rather don't talk about that. The world is not going to go down on the financial turmoil in Greece, but rather on the financial woes in America, where the public debt is nearly 100 percent of GDP. If you add the additional planned expenditure of 60.000 billion dollars, the land can mathematically not even pay off its debt. Only when all the dollars earned in that country are immediately used to repay the debt, but then they've got nothing to keep the economy afloat. "