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The political class and Central Banks are unable resolve debt issues in any meaningful way

Phoenix Capital Research's picture




 

Yesterday we assessed how elements of the financial media are either unbelievably lazy or completely complicit in helping to maintain the illusion of success for the Centralized powers (large governments and Central Banks).

 

Today we move on to addressing how the political class and Central Banks are unable resolve debt issues in any meaningful way.

 

Going into its financial crisis in 2009, Greece had a GDP of $341 billion. To put this into perspective, it’s roughly the size of the state of Maryland. Greek debt was roughly $370 billion that year, giving Greece a Debt to GDP ratio of about 108%.

 

It’s a strikingly small amount of money for a collective economy of nearly $18 trillion (the EU). Indeed, Greece contributes only 2% of the EU’s total GDP. And yet, the ECB working with the IMF has not been able to resolve Greece’s issues.

 

Let’s let that simmer for a bit…

 

A Central Bank, working with the IMF was unable to resolve a debt issue for a country that comprises less than 2% of the economy of which the Central Bank is in charge.

 

How is this possible?

 

First and foremost, the ECB had little if any interest in Greece’s well-being as an economy. For the ECB, the “Greek issue” was really more of a “large European bank issue.” In that regard, the ECB was focused on one thing.

That issue is collateral.

What is collateral?

Collateral is an underlying asset that is pledged when a party enters into a financial arrangement.  It is essentially a promise that should things go awry, you have some “thing” that is of value, which the other party can get access to in order to compensate them for their losses.

For large European banks, EU nation sovereign debt (such as Greek sovereign bonds) is the senior-most collateral backstopping hundreds of trillions of Euros worth of derivative trades.

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 last two 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 were launched on 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 ECB and the IMF failed to “fix” Greece. Indeed, the below chart makes it plain that all of the bailouts didn’t actually do anything to solve Greece’s debt problems: the country’s external debt has actually barely budged since 2010!

 

Note that after a brief dip in 2011-2012, Greece’s external debts rose right back to where they were in 2010 at the beginning of the debt crisis. Moreover, because Greek GDP dropped along with its debt levels in 2011-2012, the country’s Debt to GDP ratio has effectively flat-lined.

In short… neither of the first two bailouts actually solved ANYTHING for Greece from a debt perspective. Between this and the collateral discussion from earlier, the evidence is clear: the ECB has no interest in fixing Greece’s problems. Both bailouts were nothing but a backdoor means of funneling money to the large European banks using Greek debt as collateral on their derivatives trades!

Another Crisis is brewing. It’s already hit Greece and it will be spreading throughout the globe in the coming months. Smart investors are taking steps to prepare now, before it hits.

If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

 

We are making 1,000 copies available for FREE the general public.

 

We are currently down to the last 25.

 

To pick up yours, swing by….

 

http://www.phoenixcapitalmarketing.com/roundtwo.html

 

Best Regards

 

Phoenix Capital Research

 

 

 

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Sun, 08/09/2015 - 02:55 | 6406399 Intelligence_In...
Intelligence_Insulter's picture

kids are still going to college, now knowing they are useless.

Sun, 08/09/2015 - 00:45 | 6406267 Jack Oliver
Jack Oliver's picture

The EU is printing 60 billion euros a month - they could have helped Greece out but prefer to steal their assets - Pensions in Greece are now 98 Euros per MONTH - Greece has 9 trillion dollars worth of NG - THATS why the EU has done this to Greece - Sell Greek NG to the European market and cut Russia out !!

Sat, 08/08/2015 - 19:55 | 6405848 ThrowAwayYourTV
ThrowAwayYourTV's picture

Fiat money never has worked and never will work. Thats why goobermints turn their police and military against the civilian populations. When it all folds as it always does, the only control they have is by brutal force.

Sun, 08/09/2015 - 01:43 | 6406335 Wild E Coyote
Wild E Coyote's picture

Fiat money has been working for thousands of years all around the globe in various forms.
With leather, cloth, paper. Or electronic numbers. Etc, so please don't say fiat money never worked.
What you may be trying to say is that Fiat money managers cannot be kept honest.
The problem is thus not fiat or non-fiat gold coins.
The problem is always greed and that destroys even economies based on Gold.

Sun, 08/09/2015 - 07:59 | 6406582 ThrowAwayYourTV
ThrowAwayYourTV's picture

Right, and 1000 years has what meaning when it failed like it did in Greece and Rome.

Go back to when your father bought his first home and look at the price when you bought your first home. Now tell me fiat money wont eventually fail again. Unless, of course they can reel in and burn trillions of $$ and drop the prices of everything across the board to almost $0.00

Revealed; The Men Who Own and Run the U S Government

https://youtu.be/bKwO1onXAaI

Sat, 08/08/2015 - 19:30 | 6405814 Duc888
Duc888's picture

 

 

No shit.  All CB's have to "offer" is debt.  They make their living off of the skim of production and productive people.  They're the ultimate leechfucks of the food chain.

Sat, 08/08/2015 - 17:56 | 6405637 lucky and good
lucky and good's picture

It is likely Greece will soon exit the Euro-zone, but do not be surprised if it is done under some new or politically correct moniker that puts the action under the most positive light possible. One way to re-frame this is not to view it as a bailout but as “humanitarian aid”. Two things are apparent, this soap opera is far from over and that Greece remains a money pit or "black-hole." This has generated suggestions that Greece take on a new "quasi membership" status of half in half out.

 Keep in mind the fact Greece is totally broke and that just because Greece defaults does not mean the debt suddenly vanishes. All dept is not created equally and lawsuits and disputes will rage on for years maybe even decades. Yes, write offs will be made and the balance sheets of those holding the debt will feel the blow, but the carnage will play out over time rather than be immediate. While people point out Greece is a small country and a small part of the Euro-zone GDP it has a massive amount of dept, and debt does matter!

 Make no doubt about the fact this makes no practical difference because a series of back-hand deals has already transferred the debt to the people of Europe. The real issue now before politicians and bankers is how to create the illusion this doesn't matter and minimize both the blame and the fallout. More on this subject in the article below;

http://brucewilds.blogspot.com/2015/07/grexit-coming-how-they-will-save-face.html

Sat, 08/08/2015 - 17:27 | 6405574 KnuckleDragger-X
KnuckleDragger-X's picture

The ECB is going to be eating a lot of debt soon and the EU, no matter what Germany thinks, will have a hard time eating the loss.....

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