Its All Greek To Me?

Excerpts from Bloomberg:

Greek Debt Swap Counterparty Risk May ‘Spook’ Market (Update1)

By John Glover
Jan. 29 (Bloomberg) -- Greece’s economic woes will “spook” the derivatives market because of concern the nation’s banks may struggle to honor their credit-default swap trades, according to BNP Paribas SA.

Asset quality at the country’s lenders will deteriorate as the economy slows, forcing them to mark down about 40 billion euros ($56 billion) of government bond holdings, analyst Olivia Frieser wrote in a note to clients today. Funding costs are also rising as the European Central Bank tightens its lending criteria, Frieser wrote.

“What will spook the markets is CDS counterparty risk, our understanding is that Greek banks were active CDS players, and there is no way of finding out about these particular exposures,” the London-based analyst wrote. “As long as Greek sovereign and bank spreads remain under pressure, this will weigh on the wider European banking sector.”

The $26 trillion market for credit-default swaps is used by banks, hedge funds and insurers to insure against default and speculate on the creditworthiness of countries and companies. The counterparty risk is that one side of a contract isn’t able to meet its commitment.

Credit-default swaps on Greek sovereign debt and the nation’s banks soared this month on concern the country won’t be able to raise 53 billion euros this year to reduce a budget deficit of almost 13 percent of gross domestic product, the biggest shortfall in the European Union.

Five-year swaps insuring 10 million euros of National Bank of Greece SA debt today surged 46,000 euros to 419,000 euros, according to CMA DataVision prices.

“The post-issue performance of the bond looks like a horror scenario to any government bond investor,” Tim Brunne, a strategist at UniCredit SpA in Munich wrote in a note to investors today.

The French banks that have the largest Greek businesses are Credit Agricole SA, which owns Emporiki Bank of Greece SA, and Societe Generale SA, which has stakes in Geniki Bank SA and Hellas Finance, according to Frieser.

Investor concerns about Greece are spreading to nations including Portugal and Spain, which must both tame budget deficits. Claims of foreign banks, led by German lenders, on Spain represent 3.8 times those against Greece, meaning “the Spanish sovereign is indeed more important” than Greece, Frieser wrote.


Sovereign debts continue to plague the markets and investors. 
First we had the Iceland crisis and many European savers lost their money.
Second we had the Latvian debt problem appear that Swedish banks were heavily involved in.
Then we had Dubai with more European Bank involvement.
Now we have Greece with high sovereign debts that will be hard to continue to roll over without huge interest rate increases.
And the risk of Greek default is rising.
The crisis in Ukraine may lead to the election of a pro-Russian government in February.
Still developing are problems in Portugal, Spain, Italy and the UK.

Notice a trend developing?
Iceland has a tiny economy                 ($12 billion  GDP - 2009 estimate)
Latvia is a very small economy.          ($24 billion GDP - 2009 estimate)
Dubai is a somewhat large economy. ($35 billion GDP - 2009 estimate)
Greece is larger still.                          ($338 billion GDP - 2009 estimate)
Ukraine is in crisis now                     ($115 billion GDP - 2009 estimate)
Portugal's crisis is still developing    ($220 billion GDP - 2009 estimate)
Spain's economy is even larger.      ($1.438 Trillion GDP - 2009 estimate)

There is a creeping debt crisis that many economists seem to be denying.

The UK  ($2.2 Trillion GDP) also has a growing sovereign debt problem and may soon experience a currency crisis.
As does Japan, ($5.0 Trillion GDP) the second largest economy in the world.

So, will the Euro hold together?
At this point, it is an open question.  If governments are prepared to adopt strict austerity measures and reduce spending, it is possible that the Euro will survive.
In my view, given the historical actions of governments, it seems likely that either:
a) the Euro does not survive at all or
b) the Euro membership shrinks drastically
Euro troubles and high Japanese debt seem to point to US dollar dominance in the short to medium term, and a continuation of the rebound in the US dollar index as we pointed out in a previous post back in December.  This is not because the US dollar looks so good, but that most other currencies are beginning to look very ugly.
US Dollar Revival Begins
In the short term this looks good for the sale of US treasuries, but in the medium to long term, the US debt will force some drastic austerity measures here.
In my opinion, the temporary strength in the US dollar will present a further opportunity to buy precious metals as the great bubble in US government bonds continues to inflate.

And we also remember that when the US dollar goes up, crude oil and stocks tend to go down.


  1. PW, do you believe that in the long term, possibly in five years, the dollar will experience a currency crisis like what England and Japan will experience?

  2. In my view, given the current trends and attitudes within government and central banks, all fiat currencies are in jeopardy. Although perhaps the commodity currencies of Norway, Canada and Australia are in the least difficulty. The Central Bank of India also seems to be more restrained than the others.
    The US dollar, in my opinion, seems to be on borrowed time - but this could go on for quite a while given its present reserve currency status.

  3. PW, do you believe that a bailout of Greece by France, Germany, or the IMF will actually occur? what would be ramifications for France and Germany if they managed to bailout Greece?

  4. In my view, some sort of bailout of Greece is likely. While this may be repugnant to Germany in particular, with its more conservative fiscal management, Brussels will attempt to keep the Eurozone together. If my view is correct, it also opens the door to bailouts of other Euro members with serious debt problems. Portugal, Spain, Italy and Ireland come to mind. The sovereign debt crisis seems to be gathering momentum that will lead to a second more serious crisis. At that point the elite will probably try to force an international currency based on Special Drawing Rights (SDR) of the IMF. I talk about this possibility in my December post Power Elite Agenda. It is something we must resist if we value liberty.

  5. About India:you must be kidding-public deficit(federal,states...) is more than 12%BDP and central bank is printing like mad and giving it to people,unlike in USA and EU-they are giving it to the troubled banks.That is reason for high inflation for Indians and no inflation for us.
    USA,UK and Japan have the same terrible deficit.EU has maybe half that or even less.Greece is only tiny bit of EU.
    From my experience,only way to destroy a currency which performs it´s function as a medium and store of value is hyperinflation and/or civil war.We did both in Yugoslavia.
    Where do you see that in EU???
    I can imagine disintegration or hyperinflation in UK and big troubles in USA between Socialists and True Americans.
    We should all return to Gold standard,as we were before WW1 and WW2.


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