Soon to be front page news again will be Greece and their
insolvency. The question will remain (for a time) whether or not they
stay in the Eurozone, leave by choice or get “kicked out”. I am not
even sure if being forced out is a legal option, we may see.
The latest pieces of news has been a claim that Greece will be funded with
a monthly credit card payment of 5 billion euros by Russia …then denied by
Russia. The other news was “federal Greece”, after raiding pension
plans is now confiscating local reserves for the “good of the
nation”. The populace is getting very antsy as demonstrations and
violence have begun to erupt.
Let’s look at the second piece of news first as it was most predictable,
as was the reaction. Of course “confiscation” of balances were going to
occur sooner or later, this was a given and also a given to spread
elsewhere. History is strewn with precedent where bankrupt governments
scratch and claw at anything they can get their hands on, did anyone not
expect this? Greece is mathematically broke and in the same boat as a
homeowner who lost a job. They are digging into retirement balances,
the credit cards are all maxed out, they have already borrowed from relatives
and are in the process of selling their furniture and anything else not
nailed down. They are broke, any monies lent to them might as well have
been placed on a bonfire for the heat value because they will not be paid
back.
Which leads us to the 5 billion euros Russia allegedly will “forward” or
lend to Greece. If this is true, it’s another masterful move by Mr.
Putin! NATO sanctions will run out within the next 60 days and must be
renewed (voted on) in order to be renewed. NATO participants must vote
unanimously to renew the sanctions, Mr. Putin may have pulled a page right
out of American politics …just buy a vote and go on down the road? I
suspected this would happen, if true, even though it buys a little time
(maybe a month or two), it does not change the big picture at all.
Greece is broke, they cannot nor will they ever pay back what has been
borrowed (especially post 2012 debt). They will default one way or the
other and sooner rather than later.
So why does tiny Greece matter to anything in the grand scheme.
Going back to my last article “The Mother of All Margin Calls” is at the root
of it. Greek debt even to this day when everyone knows Greece will not
ever make good on their debt, is carried on the books of bank portfolios at
100%. It doesn’t matter that trades are done at less than 50% of par or
much less, Greek debt is used as “tier one” capital …and HERE LIES
THE PROBLEM!
Let’s look at this from two different angles. First from a
“carrying” standpoint and then from “lending” standpoint. They both
arrive at the same ugly destination but via different routes. French
and German bank portfolios are stocked full with Greek sovereign debt, if
they marked these even close to reality the losses will be staggering.
Remember, this is “tier one” capital considered as “good as gold”. How
will they replace the holes punched into their collateral structure? I
would also remind you, The ECB itself hold 100 billion euros worth of
Greek debt, how does the issuer of the currency account for a 50% haircut?
Or even a complete wipeout? Where will the new capital come from?
Remember, “margins” are already razor thin and in some cases under
capitalization exists even WITH this fake accounting!
This will of course hit home with the Greek banks
themselves.
Looking at this from another angle, since the Greek debt is tier one
capital, banks can, and already have lent amounts up to ten times value …OFF
of the Greek debt! The problem is not just the “writedown” and need to
raise new capital, much of what has been lent out and levered off of the
Greek debt will need to be “called in”. What does this do to the
markets and the real economy? Obviously, forced sales of financial
instruments will occur as well as real businesses being closed as their
funding structure is called in and pulled out from under them. A death
spiral is caused both financially and economically which will not be stopped
and will only spread like a wildfire!
There is one more angle to look at and that angle is the derivatives
created off of the Greek debt. Looking at credit default swaps, there
is no doubt “someone” will have to pay when the “insurance” is claimed.
CDS in many instances happens to be 10 times or more the underlying debt
itself so these 350 billion euros may very well have insurance outstanding of
3.5 trillion euros. Who has this kind of money to pay up? In many
cases (think Deutsche bank and others?), banks actually holding Greek debt in
their portfolio are also issuers rather than buyers of CDS, this is called a
“Texas hedge” with double or more exposure!
Going full circle, we looked at the Fed’s reverse repo agreements spiking
in volume, this can only be explained by the need for “collateral” for
the financial system. What will a Greek default do? It will
create the need for even more collateral, and LOTS OF IT to keep the façade
of solvency intact. Though Greece is not a big player, think of them as
a minor repair for the car of the couple who have maxed out all avenues of
credit. Even a small hiccup is enough to upset this margined cart
because of insufficient capital, Greece fits the description! They are
by no means all by themselves, the entire financial system is Greece to one
extent or another. Greece is only the canary that will expose and
impose margin calls across the globe. I would like to mention one more
canary in this coal mine, bookies are no longer taking bets on Greece’s
default and exit from the Eurozone …it is now that obvious!
