How Greece Could Create Another Round of Systemic Risk Pt 2

This is a
continuation of my first essay, How Greece Could Create Another Round of
Systemic Risk Pt 1. That essay focused on how Greece, while a small
player in the Eurozone, could trigger another round of systemic risk as a
result of the interlaced European banking system.

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, as
stated before, 70% of exposure to Portugal, Ireland, Greece, and Spanish debt
is from foreign entities.  The
below chart from BusinessInsider does
an excellent job of revealing just how big systemic risk is based on EU debt.

The above
chart shows the bank exposure to peripheral countries debt as a percentage of
GDP. For instance, UK bank exposure to Irish debt is roughly equal to a little
over 6% of UK GDP, German exposure to Spanish debt is north of 5% of German
GDP, etc.

To say that
systemic risk is a MAJOR problem for the EU would be the understatement of the
year. For instance, if Portugal defaults, Spain’s banks will get taken to the
cleaners. This in turn could trigger a HUGE systemic collapse as exposure to
Spanish debt is equal to 4% or more of GDP for Switzerland, France, Germany,
the UK, and the Netherlands.

And it’s not
as though the US is somehow free from this either. Altogether the US has $390
billion worth of exposure to PIGS (Portugal, Ireland, Greece, and Spain) debt.
While not an enormous amount of money relative to US GDP (it’s roughly 3% or
so), we must remember that the US commercial banks have over $240 TRILLION in
derivative exposure on their balance sheets.

And 82% of
this ($200 trillion) is related to interest rates. 

This is why
Europe is BIG deal: a collapse in the bond markets there would push interest
rates through the roof and result in various interest rate spreads (LIBOR,
Treasury to Swiss Franc, etc) going haywire, which in turn could trigger
another “Lehman” type event in the derivative market.

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

[Clowns on Acid]

Just like the Atlanta school system...you are encouraged to cheat rather than how to compete.

[The Flying Dutchman]

Where's Italy in the graph?

France is well exposed to Italy.

[speedy]

Too true, the french bankers are well known for exposing themselves.

[jtaskinen]

why don't you stop posting your stupid self-promotions, takes space from good writers.

Thanks

[speedy]

It must be awful for you to be paying good money in order to be forced to read stupid self promotions.

[zorba THE GREEK]

 I find it hard to believe that nothing was learned from Lehman's. CDS's have not been brought

 under control and now threaten to destroy the world banking system. What good are stress tests

 to banks if CDS's are ignored. With the level of incompetence of our world leaders, we are surely

 doomed to suffer a fate far worse then most people believe possible.

[ebworthen]

Yup.

Typhoid epidemic 3 years ago but bankers still drinking from the communal cup at the well.

They fleeced the populace, and continue to socialize their losses and privatize their gains, and no one is in prison and there are no bankers hanging from lamp posts and tree limbs, hmmmm....

No wonder they are still at it.