The Bank for International Settlements Quarterly Review for
June, 2011 is the first black and white publication I’ve seen on the actual
size of the Greek, Irish and Portuguese (PIG’s) debt problems as well as how
much the United States and individual tax payers may be on the hook for if it
all goes pear shaped.
There are four interesting points concerning these debt
issues. These include, who owns the debt, who insured the debt, who profited
along the way and finally, who may be left holding the bag.
Initially, Europe is responsible for approximately 95% of
the debt of these countries. Most of this would be born directly by Germany and
France. However, these countries have purchased Credit Default Swaps (CDS) from
U.S. banks to protect themselves on approximately half of the debt they own.
This means that if the countries in question end up defaulting on their loans
the U.S. banks that sold the credit default insurance will be on the hook for
making France and Germany whole again.
The data in the tables is pretty extensive but the end
numbers look like there is roughly $890 billion in loans that are in danger of
defaulting. The U.S. exposure to these losses both directly and via credit
default insurance that U.S. banks have sold is about $200 billion. More than half
of that is in Greece, which will be the first to default. U.S. banks are on the
hook for approximately $100 billion in credit default insurance to PIG
countries with about $35 billion directly insuring Greek loans. The total
outstanding credit default insurance sold by U.S. banks to European countries
is more than $1.5 trillion dollars.
A quick recap - Germany and France bought Greek debt then
turned to U.S. banks to buy insurance on the debt Greece and other countries
sold them. U.S. banks collected the fees and sold the insurance even as they
were recovering from their own bad loans and accepting bailout money to heal
their balance sheets. The fees they collected went on to pad their bottom line
and allowed them to post record 2010 earnings. These earnings allowed banks to
payout record bonuses for a second consecutive year.
The pending default of Greece will leave U.S. banks on the
hook for at least $35 billion dollars. Ireland will add $54 billion and
Portugal another $41 billion. These banks also hold direct debt to the tune of
another $63 billion. When the market moves on Greece, it will move on these
other countries as well. It is simple stampede mentality. Remember the collapse
of ’08?
The AIG bailout was due to their inability to meet $85
billion in obligations. It was deemed, “too big to fail.” Bank of America and
Citigroup each received $45 billion in TARP money following the sub prime
implosion. JP Morgan, Goldman, Wells Fargo and others required governmental
assistance as well. Total U.S. bank exposure to Portugal, Ireland and Greece is
more than $193 billion.
There are only two arguments left to decide in the coming
debacle. First, will we have a partial or a complete default? Complete default
benefits the Europeans and leaves the U.S. on the hook for the balance.
Secondly, when France and Germany come to the U.S. seeking their insurance
payouts will our banks be able to afford them. I don’t believe these banks,
funded with taxpayer money and using our savings accounts as collateral for
making the loans have the resources to cover their losses. Therefore, the
taxpayer may be left holding the bag…again.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
