Investors simply do not understand the significance of Greece. Comparisons are being made to Lehman, but these comparisons are mute for the following reason: Greece is a country not a private institution.
This is not a subtle difference. True, Lehman’s derivatives were spread throughout the global financial system just as Greek sovereign debt is. However, investors are missing the point of the fall-out a Greek default would create.
Firstly, let’s think about Lehman. When Lehman went under, half of the other banks that were in trouble had already been merged with larger entities (Bear Stearns, Merrill Lynch). Those banks that were still standing after Lehman went under, changed to bank holding companies (Morgan Stanley, Goldman Sachs) in order to receive special access to Fed lending.
None of these options exist regarding the sovereign crisis in Europe today. If Greece defaults, Portugal can’t merge with Spain. And Italy can’t suddenly change itself to a new form of country that gets special treatment from the ECB (it’s already getting special treatment from the ECB by the way).
This cuts to the core issues for sovereign defaults in the EU. Here are the facts regarding those EU countries on the verge of collapse:
1) You cannot solve a debt problem with more debt
2) Austerity measures slow economic growth which in turn makes it harder to meet debt payments
This is simple basic common sense. But these are the policies being promoted by EU leaders: we’ll give you more money if you implement more austerity measures to get your finances in order.
The fact of the matter is that there is simply no way on earth that Greece can get its finances in order (short of a massive default). Greece has terrible age demographics, a lack of economic growth, and cultural issues (e.g. paying taxes is for suckers) that it impossible for the country to solve its financial problems.
In plain terms, Greece racked up too big of a tab and simply doesn’t have the means of paying it. End of story. The world needs to realize this. Because Greece will default and it will default in a big way,
The impact of this will be tremendous. For one thing, pretty much everyone is lying about their exposure to Greece. Consider Germany for instance. According to the Bank of International Settlements German bank exposure to Greece is only $3.9 billion (though they state this is only on an immediate borrower basis).
This is a bit odd as according to The Guardian German banks have nearly 8 billion Euros’ worth of exposure to Greek debt. And they only include 11 German banks in their analysis. However, of those 11 banks, THREE of them have Greek exposure equal to more than 10% of their total outstanding equity.
My own analysis, which I recently shared with my clients, shows even these numbers to be way below the mark (one of the “strongest” banks in Germany alone, by its own admission, has twice the exposure to Greece that the Guardian claims).
So, when Greece defaults, the fall-out will be much, much larger than people expect simply by virtue of the fact that everyone is lying about their exposure to Greece.
Secondly, when Greece defaults, the other PIIGS (Italy, Ireland, Spain, and Portugal) will have to ask themselves… “do we opt for austerity measures and more debt which obviously didn’t work for Greece and will only stifle our economies more? Or do we also default?”
That’s a very tough question to answer. But I’d wager more than one of them will opt for default. And if you think European bank exposure to Greece is understated, you don’t even want to know how bad exposure to Italy and Spain is (to give you an idea, the German bank I referred to earlier, again by its own admission, has total PIIGS exposure equal to 60% of its equity).
Folks, the European banking system is in huge trouble. This won’t be Lehman 2.0. This is going to be something far, far worse. Some of these countries are already sporting unemployment of 20%. What happens when their largest banks go under?
Also, remember that the EU is:
1) The single largest economy in the world ($16.28 trillion)
2) China’s largest trade partner
3) Accounts for 21% of US exports
4) Accounts for $121 billion worth of exports for South America
It’s clear the EU is already heading into a recession without a banking crisis hitting. What do you think will be the impact when Europe as a whole experiences its own “2008” only on a sovereign level?
We are literally on the eve of a Crisis that will make 2008 look like a picnic.
On that note, if you have not already taken steps to prepare for the next round of the Crisis now is the time to do so while the system is still holding together.
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