Executive Guide to a Failed State’s (Greece) Fiscal Battle Drama: Part 2

Here are the gold reserves kept at the New York Federal Reserve Bank….

And then there are the Greek Sovereign bonds used as reserves in some European Banks…

Bank capitalization summarized:
1. Banks need operating/reserve funds to handle daily transactions and temporary losses until offset by gains.

2. The European Banking Authority has a 9% capitalization for banks.

3. This bank capital is kept in “totally safe/easily liquid-able assets.” Government bonds? Greek government bonds? There are gold bars in the basement of the NY Federal Reserve bank.

4. If a bank’s reserve capital falls, loans and other profit making activities are reduced proportionally.

Lower bank capital or a higher than 9%capitalization rate’s effects on local/State economies:
1. Less money to loan, less economic activity/jobs, less income for bank.

2. A run on a bank or a large loss of deposits removed to safer locations, which in turn reduces available capitalization funds.

If many of a State’s banks are down graded, it affects the entire State. “Moody’s Investors Service cut the debt ratings of six European countries including Italy, and Portugal and revised its outlook on the U.K.’s and France’s …citing Europe’s debt crisis. …with a high potential for further shocks to funding conditions for stressed sovereigns and banks.”

Now, common sense;
1. If you’re a wise Greek, you get your cash out of Greek banks and put it in another European bank (where the government might seize it and convert it to new Greek drachmas?), or somewhere else, under the bed, or in a foreign bank which doesn’t report deposits. So, Greek banks are holding €50 billion in Greek bonds which are expected to devalue 70%, are losing depositors, and still have outstanding loans on their ledgers, but insufficient capital to make any new loans.

2. Many European banks, especially French banks, are holding the €50 billion of Greek debt. So, French banks will pressure Sarkozy to prevent Greek default. Sarkozy, facing, an election next month, leans on his good buddy, Merkel, to delay this Greek default until after this election and “save the EU.”

3. Others holding the €70 billion in Greek debt are pressuring their politicians to prevent default or at least allow time for them to dispose of, mitigate, or to be compensated for Greek holdings.

The Greek rescue plan calls for asking the holders of the dark blue and red sector debt above to take a 70% reduction in value to help out Greece. Such an agreed reduction in value would have a ripple effect through all of the holders and they are pressuring their politicians. But many of those bonds/loans are insured against default.

US government involvement:
The US funds 27% of the IMF debt in the mustard color sector.

US holders of Greek debt:
The good (not yet exposed?) and the bad. Corizine and MFGlobal lost billions in buying of Greek and other European sovereign debt. Jon Corzine bet $11.5 billion on European sovereign debt in his bid to rebuild profits at MF Global Holdings Ltd., almost twice the net amount disclosed to investors.

US guaranteed European debt:
Dated 11/1/2011 “U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults. Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements.

Will there be pressure on Geitner, Obama, and the Fed to prevent Greek default or protect the insiders? Yes. Can bailouts be bought in the US and elsewhere? Is the Pope …?

Will Merkel delay Greek default until after French elections? Yes.

Which European banks hold what? List of European bank Greek debt exposure.

Which US banks are insuring Greek and European debt? “The insurance market reveals that investors believe Morgan Stanley is most at risk, followed by Bank of America, Goldman Sachs and Citigroup, respectively, according to market data provider CMA.”

Are US banks at a large risk? Not completely. The banks say their net positions are smaller because they purchase swaps to offset ones they’re selling to other companies. With banks on both sides of the Atlantic using derivatives to hedge, potential losses aren’t being reduced, …’The big problem with all these gross exposures is counterparty risk. …If everybody is buying from each other, who’s ultimately going to pay for the losses?” The result: ripple effect on US and other foreign banks, law suits and rich lawyers.

Will all Greek bondholders agree to a 70% reduction in value? No. Many will seek payment or insurance payout, where it exists. Again; ripple effect on US and foreign banks, more law suits and more rich lawyers.

3 Responses

  1. Koala

    Thanks for giving us the details in a succinct manner, Bob.


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