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The REAL Issue With a Grexit/ Greek Default
The situation in Greece boil down to the single most important issue for the finacial system, namely collateral.
Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile). The reason for this is because it is far more likely for a company to go belly up than a country.
Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc.) as the senior most asset pledged as collateral for hundreds of trillions of Dollars worth of trades.
Indeed, the global derivatives market is roughly $700 trillion in size. That’s over TEN TIMES the world’s GDP. And sovereign bonds… including even bonds from bankrupt countries such as Greece… are one of, if not the primary collateral underlying all of these trades.
Lost amidst the hub-bub about austerity measures and Debt to GDP ratios for Greece is the real issue that concerns the EU banks and the EU regulators: what happens to the trades that EU banks have made using Greek sovereign bonds as collateral?
This story has been completely ignored in the media. But if you read between the lines, you will begin to understand what really happened during the previous Greek bailouts.
Remember:
1) Before the second Greek bailout, the ECB swapped out all of its Greek sovereign bonds for new bonds that would not take a haircut.
2) Some 80% of the bailout money went to EU banks that were Greek bondholders, not the Greek economy.
Regarding #1, going into the second Greek bailout, the ECB had been allowing European nations and banks to dump sovereign bonds onto its balance sheet in exchange for cash. This occurred via two schemes called LTRO 1 and LTRO 2 which happened in December 2011 and February 2012 respectively. Collectively, these moves resulted in EU financial entities and nations dumping over €1 trillion in sovereign bonds onto the ECB’s balance sheet.
Quite a bit of this was Greek debt as everyone in Europe knew that Greece was totally bankrupt.
So, when the ECB swapped out its Greek bonds for new bonds that would not take a haircut during the second Greek bailout, the ECB was making sure that the Greek bonds on its balance sheet remained untouchable and as a result could still stand as high grade collateral for the banks that had lent them to the ECB.
So the ECB effectively allowed those banks that had dumped Greek sovereign bonds onto its balance sheet to avoid taking a loss… and not have to put up new collateral on their trade portfolios.
Which brings us to the other issue surrounding the second Greek bailout: the fact that 80% of the money went to EU banks that were Greek bondholders instead of the Greek economy.
Here again, the issue was about giving money to the banks that were using Greek bonds as collateral, to insure that they had enough capital on hand.
Piecing this together, it’s clear that the Greek situation actually had nothing to do with helping Greece. Forget about Greece’s debt issues, or protests, or even the political decisions… the real story was that the bailouts were all about insuring that the EU banks that were using Greek bonds as collateral were kept whole by any means possible.
This is why the current negotiations in Greece boil down to one argument: whether or not it will involve an actual restructuring of Greek debt that will affect bondholders across the board.
Greece wants this. The ECB and EU leaders don’t for the obvious reasons that any haircut of Greek debt that occurs across the board will:
1) Implode a small, but significant amount of EU bank derivatives trades.
2) Be immediately followed by Spain, Italy and ultimately France asking for similar deals… at which point you’re talking about over $3 trillion in high grade collateral being restructured (collateral that is likely backstopping well over $30 trillion in derivatives trades at the large EU banks).
Remember, EU banks as a whole are leveraged at 26-to-1. At these leverage levels, even a 4% drop in asset prices wipes out ALL of your capital. And any haircut of Greek, Spanish, Italian and French debt would be a lot more than 4%.
The next round of the great crisis is coming. The ECB bought two years of time with its pledge to do “whatever it takes,” but the global bond bubble is still going to burst. And when it does, it’s going to make 2008 look like a joke.
If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.
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What they need is some sub-prime lending to boost any sector worth raping.
This guy (Phoenix or whatever) doesn't know what he is talking about. European banks have not posted Greek bonds as collateral ( in any significant size) to the ECB. The Greek bonds that the ECB has on its books were purchased in the secondary market form European banks thus bailing out those banks early before the PSI. Only Greek banks have bank- bonds and other Greek paper on collateral at the ECB. Thus it is the ECB, not European banks, who is on the hook should Greece default. It stands to loose upwards of €100B should this happen and will need a recapitalization by the member countries.
EU banks as a whole are leveraged at 26-to-1
Phoenix C can you please provide some facts to back up your statement?
generally speaking this is correct, but hides a very important fact: most of that is because business loans are still the main corporate financing tools, in the eurozone
and this again has a lot to do that half of the eurozone economy that is still fully private, instead of public with marketable bonds and stocks
in comparison, US bank analysts are higly distrustful of business loans, they are usually the most risky part of their balance sheet, "the stuff they had to do" and which "they can't feed the markets with"
Phoenix, I think you're missing the central point here.
It's already game over.
Greece is broke, and it cannot tolerate anymore browbeating from the troika, or especially, Schauble's Germany. Greece simply cannot honor ANY restructuring commitment it makes (even if it wanted to). The Greek people would not allow domestic obligations to go unmet at the expense of satisfying the troika, and especially, big banks.
Given where the world is today, I am amazed anyone would accept the inevitable default risk on sovereign bonds, whether they be held as collateral or for any other purpose.
The only possible "solution" here is that another entity backs Greece.
Despite any negative REAL risks (geopolitical and military) an entry of Russia might pose, and there would be plenty, the whacky EU has so backed itself into a corner over this mess, that given the intransigence of Schauble and the hard line everyone has drawn, there seems no other option. Greece needs money, NOT debt restructuring.
Given the economic ties and trade dependencies Europe has developed with Russia since the fall of the wall and the Soviet system, they have begun to distance themselves from Washington, and would likely accept some kind of arrangement involving Russia.
Once the EU permits a new financial dependency backed by Russia, Putin will leverage the arrangement to extend the bear's military presence into Europe. If Putin wanted to, he could keep Greece on simmer and use them as a financial weapon to hold sway over Europe (and by extension, the U.S.) indefinitely. Washington's reaction (late) to this potential eventuality may begin before the end of the month. If we had real leadership in the White House, there would already have been a lot of behind-the-scenes asschewing by the administration of EU and troika ass. The geopolitical ramifications of a military presence of Russia in NATO's backyard is almost incomprehensible, ESPECIALLY given the U.S.-led activities and saber rattling over Ukraine.
Ultimately, as so often is the case, we may well find the financial aspects of this lunacy rather small compared to other very serious threats.
Thank you, EU...
Idiots.
m
De Nederlandse Orde van Advocaten is nog steeds niet door een minister op de hoogte gebracht over de fundamenten van het systeem 'Leven en Laten Leven'. Wat nu nog bekend staat als 'bijzondere bevoegdheden' is binnenkort onderdeel van het beleid van het ministerie van 'waarheidsvinding en verzoening'.
http://www.volkskrant.nl/binnenland/advocaten-verontrust-na-brief-over-m...
Ieder lid van netwerk @SuperWil is niet zozeer een 'target' van de @*IVD, maar een 'KanariePietje'.
http://www.nrc.nl/nieuws/2015/04/17/openbaar-ministerie-verdenkt-juwelie...
In het RENTE=BELASTING-plan kan een (rechts)persoon ook niet meer worden aangeklaagd voor belastingfraude, want in het DAB-systeem wordt bij iedere transactie automatisch btw, inkomstenbelasting etc, geheven.
http://www.volkskrant.nl/buitenland/vn-ambassadeurs-in-tranen-bij-zien-v...
Leden van de Veiligheidsraad van de VN hebben inmiddels de info gekregen dat ...
Just so exactly what if it does go down this way?
Europes' alternative is to deal with broke Anglo-American bankers thru their busted puppet governments of hollowed out countries hobbled and shackled by debt and the need to service it, versus a thriving unemcumbered (by debt, regulation and xs taxation) entity with a profound depth of natural resources and a real world leader.
Seems a "no brainer" as we say from this side of the pond.
Greece was literally the trojan horse for the GOD ALMIGHTY USA to destroy the euro and remain the hegemon of the west.
We send our best snakes in (goldman sachs) had them rig the books take a big fat paycheck and walk on out.
Since then greece has become one never ending money pit eating all of europes hopes and dreams.
Goodbye Europe. New American Century. Don't fuck with Uncle Sam.
Default cannot happen as the derivatives nuclear bomb would then be set off...at least it cannot happen until it does.
Then counter party risk explodes and gold becomes king.
http://www.bloomberg.com/news/articles/2015-04-10/citi-economist-says-it...
Just declare it odios and forget about it!
I've seen this same Phoenix article about a dozen times over the past 5 years....
So does that mean that you read ZH for two years before becoming a member?
how can the ecb default on its' purchases of junk greek bonds? the shit can sit on the shelf forever. the new money has kept the banks whole for another day. not sure this is news or even a reason to worry. gram cracker, give it a rest. go take a 20 year nap at the base of a tree. if a big fucking nut hits your head and wakes you up, then blog away...
A friggin men..the real issue..is that nothing is gonna happen. As with all else..when a story is preached on msm...its an agenda. For whatever the reason..they want us to have the greece story in our heads.
Nothing is gonna happen. The money cant be repaid. Nobodys fuckin exiting anything. Stop it already.
You want a headline?..go find out WHY they want an example of greece. Why are they pushing the story on us?.
Answer that..and there's your headline.
So shove ten trillion into "Greek paper" and see who is dumb enough to buy it.
And just keep doing that.
If we hit 600 trillion even better...
Engdahl is always an insightful read...
Will Greece Join The Eurasian Union?
TND Guest Contributor: F. William Engdahl
http://thenewsdoctors.com/?p=464399
Superb article:
Guess it comes down to the Greek people deciding whether to stay under the thrall of psychopaths in Brussels, or catch a lifesaver when it is thrown to them.
Funny how we don't hear about such important developments in western controlled media, and yet some fucking American bureaucrat blames independent media for filling the gap! (The main tabloid "news" pablum in Canada this week involves some creepy news anchor in Toronto who gave inappropriate massages to co-workers, and a fat senator who racked up too many travel bills. Seriously, those are the major sheeple headline items.)
Fuck it. Default already, pull up a lawn chair and a glass of nice Greek wine. Watch European banks and Europe burn.
It should be quite a show.
So European bankers are basically huge screwups.
And the whole world gets to suffer for it.
Let THEM be screwed.
Take the word European out of your comment and you are 100% correct.
Fake tits.......Oh sorry, wrong thread
Link?
Was reading a comment from a trader in Frankfurt the other day who says he's trading with money based on physical gold collateral in a margin account. The way I understood this is that he's got the gold deposited with the trading firm and they gave him a multiple of what the actual gold is worth. I guess that's a form of rehypotethication? Now if several traders in Frankfurt are doing this and on a larger scale, it means that part of the exchange is not even trading on ECB fumes, their trading with money from even thinner air.
Anyone here have experience with this?
You sure your "friend's" name isn't Ben Bernanke?
Even if it would be to their advantage, I am optimistic enough to believe the Spanish, Portuguese and Italians have enough self respect not to mimic the Greeks.
The French , on the other hand..................
Like I'e been saying, Greece should just walk away. They are truly screwed no matter what, so the joy should be spread as much as possible. I just hope GS, JPM etc are deep into those derivatives....
ICELAND seems to be doing just fine.
1. Levverr up.
2. . BTFATH.
all the creditors in the world are hungering for collateral.
Governments have yet to figure out that hyper-taxed, hyper- regulated criminally governed and spied upon peoples aren't particularly productive or profitable, or even fun to be around (that part comes next)