How Greece Could Create Another Round of Systemic Risk Pt 1

The first
wave of the next crisis is going to come from Europe where it is clear that the
ECB has reached the End Game of monetary intervention. To whit: Greece was
bailed out only 13 months ago, it has since requested an extension on those
loans and is now receiving a SECOND bailout.

Greece, as a
country, really has very little to do with Europe’s economy (it’s about $330
billion out of the EU’s $16 trillion GDP). However, Greece was the first nation to be bailed out. And so it has set the trend
for what’s to come in Europe. And what’s to come is the following: default,
political shakedowns, and civil unrest.

Ultimately,
the BIG players in the EU Crisis are Spain and Italy with GDPs of $1.46
trillion and $2.1 trillion respectively. There literally is NO WAY the ECB can
bail these countries out. Which is why in Europe the End Game looms and
Greece’s bailouts will ultimately be irrelevant.

What I mean
by this is that the ECB has played its hand with the small players (Greece) and
is now facing problems it cannot possibly solve. There is only one outcome to
this scenario and it is default and restructuring which will involve European
banks taking a “haircut” AKA losing billions of Euros worth of money on toxic
debt.

However,
there is a MUCH bigger problem here and that problem is the same one that
created the 2008 disaster: DERIVATIVES.

US
commercial banks have over $200 trillion in derivatives outstanding on their
balance sheets. However, worldwide, the derivatives market is over $600
TRILLION in size. And the financial system in Europe is as saturated, if not
MORE saturated with toxic debt than the US financial system.

According to
the Bureau of International Settlements,
the total exposure worldwide to PIGS (Portugal, Ireland, Greece, and Spain)
debt is over $2.5 TRILLION. Most of this is in the form of derivatives. And 70%
of it is from foreign entities (banks and firms located outside of the country).

Let’s take
Greece for instance. Courtesy of derivatives, France has $92 billion in
exposure to Greece debt. Germany is on the hook for $69 billion. Great Britain
has $20 billion. And the US has $43 billion.

These
levels, while dangerous, are not catastrophic. As I’ve stated before, Greece is
NOT the big problem for the EU. However, worldwide exposure to Greek debt is in
the ballpark of $277 billion. So a default there would result in significant market dislocations.

Now consider
the exposure to a BIG Problem such as Spanish debt. In this situation, Great
Britain is on the hook for $51 billion. The US is on the hook for $187 billion.
France is on the hook for $224 billion. And Germany is on the hook for a
whopping $244 billion.

As I said
before, Greece is ultimately a small player in this mess. Worldwide exposure to
Greek debt is $277 billion. Worldwide exposure
to Spain, on the other hand, is north of $1 TRILLION.

Now this is
where things get REALLY tricky. Because of the intertwined nature of the
derivatives market, a Greek default could result in systemic risk for the
simple fact that if one of the banks that goes down with Greece has extensive
exposure to Spain as well, then things could get ugly very, VERY fast.

Indeed, given
that the European banking system is just as, if not MORE saturated than the US’s
when it comes to toxic debt, even a small player like Greece could end up
triggering another round of systemic risk.

Remember,
the financial system is even more leveraged today than it was during the Tech
Bubble. So a derivative collapse from anywhere could trigger a sharp sell-off
as banks and institutions have to sell positions to meet margin/ redemption
calls. Which in turn would result in more selling and so forth.

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Good
Investing!

Graham
Summers

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Comments

[Aunty Christ]

Dude, switch to decaf. You are naively assuming that the banks derivatives exposures are ALL to the long side ( which they aren't). On a net basis, the true economic exposure is a fraction of the nominal exposure. I know you want to sell shit on your website, but you're hurting your own credibility spewing junk

[MrBinkeyWhat]

Fracking derivatives. Got your physical PM's yet? How about your farm land / means of production? Seeds?  Guns and ammo? Like minded friends? (possibly the most important---separation of labor).

[espirit]

Risk is already priced into the markets and is keeping a sideways chop.

Bring on a failure or two, all else is just false flag BS.