Sovereign Debt Risk and Basel III-The next Financial crisis

thetrader's picture




Basel III evolved after the last financial crisis. The new rules are to make banks and financial institutions more stable by increasing the capital ratios.

From Wikipedia;


BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision.[1] The third of the Basel Accords was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The OECD estimates that the implementation of Basel III will decrease annual GDP growth by 0.05 to 0.15 percentage point.[2][3]


Imposing capital requirements is easy, but what is capital and what are real risk assets? Those who remember the last crisis where Bear Sterns, Fannie, Freddie and other institutions went bust, realize what untamed over leverage can cause. Basel III wants to strengthen banks capital ratios, but seems rather slack regarding what is a risky asset.


Since Fannie and Freddie guaranteed more than half of the U.S. market, its overleveraging set the tempo for the entire housing market during the bubble years. Pinto notes, “In order for the private sector to compete with Fannie and Freddie, it needed to find ways to increase leverage.” And so they did, increasing the likelihood that when the market fell, there would be a meltdown.


Basel III, by categorizing sovereign debt as risk-free, is doing precisely the same thing. Except instead of the $10 trillion U.S. mortgage market, now we’re talking about the more-than $50 trillion of sovereign debt worldwide. That does not include the untold trillions of sovereign debt credit default swaps, insurance policies bondholders buy against default.


What happens if sovereign debt risks start blowing up, while people see them as risk free? Welcome to some real Black Swans.


Further reading, courtesey of Bill Wilson The Next Financial Crisis


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lawrence1's picture

Just read that the Swiss government is discussing the issuing of a gold coin to circulate as a second currency.  Goes to show, you cant keep the best money down.  Anyone know something about this?

Boxed Merlot's picture

"Imposing capital requirements is easy, but what is capital and what are real risk assets?"...

Used to be sovereigns were sovereign. Once a sovereign entity accepts debt, sovereignty by definition ceases. The risk is now on to regain the sovereignty from the issuer of debt. The real risk asset is sovereignty. Our tools in DC are nothing more than sharecroppers beholden to the BIS and whatever mandates they dictate.

The Bank of International Settlement holds 500.7 tonnes of gold as at the end of 2010. Why?

Gold held as at the end of 2010
BIS………………..500.7 tonnes

Greece…………….111.6 tonnes
Portugal…………...382.5 tonnes
Spain………………281.6 tonnes
Total:……………...775.7 tonnes

In the third quarter of 2009 it held just under 120 tonnes. These were part of currency/gold swaps. There are no details of the names of the counterparties. Coincidentally, they could be nearly the total of the ‘official’ gold holdings of Greece, Portugal and Spain.

What of Greece’s 111 tonnes of gold?

"When the whole world hits these types of crises [such as war], a currency price put on gold is not the basis on which gold is used. The emotional value in such times is far higher for any deal to be concluded. At such times gold can secure far more goods that its price implies, because of the dubious value national currencies will have internationally. When gold is tied to these currencies, then gold has considerably more value because of the support it gives these currencies. And this is why the issue of Greece’s gold is so pertinent."

by Julian D. W. Phillips - Gold Forecaster
Published : July 07th, 2011

sgorem's picture

The Powers That Be are not going to lose their death grip on the world until the "Cliff Dwellers", (the people who have been pushed over the edge of the cliff by unemployment, loss of income, family, savings, HOPE), come after these Wall Street & Global Shylocks, along with our malfeasant and corrupt government(s) with the vengeance needed to make The Point. Like the guy in Arizona who flew his plane into the IRS building. The man in New England who set himself on fire, etc. There will be others, and more often, as the vise of The Evil Ones squeezes the Life out of the last sheeple.

dcb's picture

the concept of risk free is a joke.

Iam_Silverman's picture

"the concept of risk free is a joke."

Unless you got in on the ground floor with Bernie Madoff and family!

delacroix's picture

It only cost madoff, his freedom, and one son. is that too much risk, for riches?

10kby2k's picture

30 year party and celebrity status in prison with possible appointment to Federal Reserve---YES

zorba THE GREEK's picture

 Sovereign debt is risk free if sovereign can print money. You get money back, but what is 

 money worth when you get it?

Nate H's picture

The problem isn't that sovereign debt isn't risk free - everyone knows it has risk. The problem is the haircut needed by banks that own trillions in sovereign debt pops as soon as there is a downgrade. THAT is the real issue here.  If they follow Basel I and II rules (by needing e.g. 20% margin for junk as opposed to 0% for AAA sovereign), we have another Lehman domino situation...

gorillaonyourback's picture

its not risk free if nobody buys your bonds

pitz's picture

Sounds pretty risky to me...

pitz's picture

So where do people run when 'risk free' is not only not risk-free, but is, in fact, the riskiest of the risky?  I mean, sovereign credit is essentially de facto unsecured, since, short of military operations, sovereign assets cannot be seized by a creditor. 


Stocks?  Gold?

r101958's picture

Yes, silver, gold, arable land, CHF and Canadian dollar.

MFL8240's picture

Stocks are right up there with US treasuries.  Gold and Silver Bullion may be our only salvation??

snowball777's picture

There is no 'risk free' any more than there is a 'free lunch'.

TBT or not TBT's picture

War eh?

War "made sense" as a way to increase wealth back when farming was both the essential energetic foundation of civilisation AND the source of food for armies waging wars(a summer time activity back when). Apart from some sort of war to seize oil fields...and even then that wouldn't pay off the bad sovereign debt...wars for resources today would use far more resources than they threw back to the sovereign nation waging them. The victims of this tragedy....that is to say dupes of politicians of the past promising them future candy while they worked and voted in the present....will simply see their hopes crushed. One way or the other the occidental welfare states' pensions and social insecurity programs will simply not make ends meet to the level promised back when. That's how this ends...with some wars and famines too, but that's for the turd world, not here.

Confuchius's picture

You, serf of the USSA, are already past the third world and well into the fourth.

TJW's picture

@JohnG: "War."

Good idea!

I'm writing from the US. Whom do we want to conquer? Certainly not just the Libyans, Iraqis, and Afghanis. Chump change. Come on, lets start brainstorming now.

The basic rule of not getting involved in a land war in Asia rules out China and Russia. Besides, their militaries are pretty advanced. More MENA countries? Lots of oil there. Africa? Lots of a number of commodities. Latin America? Hmmm, Latin America. Again, lots of commodities... Sexy women...

Time to start planning.

BTW, for the sarcasm challenged, /sarc.

On the other hand, it doesn't hurt to plan in advance ;)

ebworthen's picture

Next world war will involve nukes from space orbit.

I sure hope we are ahead of the Chinese on that one.

Newtons Lawyer's picture

Default, depression, deflation.  Done.


snowball777's picture

Deflation, depression, default, done.

Newtons Lawyer's picture

Default, depression, deflation.  Done.


BigDuke6's picture

How about revolution?

Jail time for the banksters and violence for lobbyists.

Wipe the slate clean.

i never was one for this but the predatory class seem to do this every century - blatantly grab what they can off honest people, and leave them to suffer.

Fuck the oligarchy - kill them all.

UP4Liberty's picture

I'm in...while we're at it - we should STIFF THE F***ING FED.

sgorem's picture

Damn Big D! I believe you're a man after OUR own hearts here! Keep 'em comin Duke6........

BigDuke6's picture

This article made me mad.

its a piece of shit article in a kgb owned rag read by pricks but when it stated nat rothschild is a sooper, dooper canny businessman.... something changed in me.

what sort of sycophantic shit is that for journalism?

i tried to put a comment into it but it was 'moderated'


laughing_swordfish's picture

As I have said before on other threads:

Obama and Boehner meeting at the White House to "solve" the debt crisis is exactly like Louis XVI convening the Estates-General at Versailles in the spring of 1789 - only this time without the rest of us - The Third Estate.

When our "King Louis with a deep tan" does not even wish to see or hear from the representatives of the people, we have but one choice.

It's time to party like it's 1789 - bring it all on: The Jacobins, The Committee of Public Safety, The Directory, and culminating with First Consul Ron Paul and Second Consul Stanley McChrystal.

We need it all - A Bastille, a Tennis Court Oath, and above all a reign of terror more complete and terrible than ol' Max Robespierre could have thought of, visited on the Banksters, The Multinational CEO's, and the entire Washington political class, along with their families and fellow travelers and co-conspirators.

It's time for guillotines, heads on pikes, and tree branches full of live decoration at the end of a rope - it's the only thing that will work.

"Vive Le 18 Brumaire!"

Things that go bump's picture

Really, this never seems to end well.  You know, once the orgy of vengence had run its course and they ran out of aristos to feed to the guillotines, revolutionary fervor died down somewhat, the show trials grew boring and the total incompentance of the new regime of France became glaringly obvious.  Though the assignat wasn't solely to blame, the rediscovery once again of paper money was heading swiftly for its usual messy end and those newly come to power were in danger of losing it - and their heads.  The Terror was a political tool, consciously chosen as a means to keep masses of dissatisfied people, who had just found the new boss the same as the old boss, in check.  After all, the revolutionary government could hardly fall back on the old divine right of kings argument for legitimacy so they chose heavy-handed fear instead. Criticisim of government was not permitted and eventually even housewives heard to complain in the market of the price of bread were hauled in before tribunals and guillotined.    

BigDuke6's picture

France really does come to mind with me too.

They really got things done.

It takes a leader of true character to see it through and the west can't seem to find the incorruptable Cromwell it needs, just generations of populist media slaves who bend over for whoever promises them the fattest cheque on retirement from politics.  Even to the point of treason eg cheney, blair etc.   All slime who weakened us for their own gain.

laughing_swordfish's picture

An Oliver Cromwell, who would have absolute rule for 10-12 years, and afterwards set the stage for a re-set of popular government is exactly what we need.

If you recall the English Civil War, after Cromwell died, instability took place for about three years, which didn't end until Charles II was "invited" back from French exile torestore the Ancien Regime.

Post-dictatorship, a Parliamentary Form of Government should be established, with a ceremonial President (say, elected for six years - one term only) whose constitutional duty might be limited to,say, presiding over the Senate (as the VP does now). Otherwise, he should be the guy who cuts ribbons and makes speeches.

In his place should be a strong Prime Minister, selected by the House Majority, whose term would be four years unless his party should lose the majority during that time or be defeated by a vote of No Confidence.

That would give a legislative majority executive power also, subject to renewal every two years. Thus, Pelosi would be out and we would be led by John Boehner.

Just a thought...

Popo's picture

War is coming. The only ones who don't know it are our leaders. To any student of history (which our leaders are not) the outcome is as clear as day. This will get exceedingly bloody. Living in cities is inadvisable.

old naughty's picture

It's us who get fooled. They know.

old naughty's picture

It's us who get fooled. They know.

BigDuke6's picture

War is here and has been here for a long time.

As the dude here in the thread - it'll be exported.


HungrySeagull's picture

War is it.

There is no other.

PM's might save you if you get in early enough. There is still time. Take delivery.

As far as the rest of it... That is for the Government who I hired at the Election to worry about.

Oracle of Kypseli's picture

Yes there are many. Head to the mountain lake region of Chile. No one cares what is happening outside of their realm. You need less than you think to retire there.



sgorem's picture

What does Llama taste like? Awful lot of earthquakes? And can you grow your own stash of coca? (I'd like to get the last word in before the Mayan "end of the world thingy in 2012).

FeralSerf's picture

I'd pass on the llama.  The fish there is excellent and plentiful.  And there's chicken, beef, good produce, wine, etc.  Drive up north (long way) to Bolivia for the coca.  There are earthquakes.

Beautiful spot --  boredom is a possibility, but boredom is more pleasant than death I hear.

malikai's picture

Llama is pretty good actually. It's kinda tough meat but they're hardy. And they produce good milk as well. I'd say the thing to do with llama meat is to make slow cook dishes like stews.  I think coca needs to grow in the foothills as it requires a bit more rain and warmth than you'll get on the high plains.

MisterMousePotato's picture

I don't get it. Look. This statement here:

"What happens if sovereign debt risks start blowing up, while people see them as risk free?"

All I wanna know is: Who are these people who see sovereign debt as risk free? And where can I go to actually observe one, or maybe talk to one? Buy them a drink and try to grok? I feel like a stranger in a strange world sometimes.

MrSteve's picture

"these people" are the ones who think the FDIC is going to cover their CDs. They are the same people who when in Greece realized that a government which can't cover a scheduled bond payment can't cover a bank deposit guarantee either. The crash in sovereign bonds is also a run on the banks. Gold under a mattress is looking smart!