Greek Debt Crisis-Bob Chapman’s Summary

/ October 27th, 2011/ Posted in Social, Economic and Financial Risk / No Comments »

interview-CorbettReport-Chapman-pt2This is part 2 of financial commentator Bob Chapman’s answer to my question about the actions of speculators targeting countries’ economies, and Canada’s position. In my last post, he covered Canadian Financial Risk; here I paraphrase his answer about Greece. The interview was podcast by James Corbett.

Part 2:
What happened in Greece was a combination of things…

  1. Ten to twelve years ago the private banks decided they could lend to Greece with impunity as long as they were part of the Euro Zone, because the other countries would bail them out.
  2. If the EU countries could not do that, the bankers would demand collateral for their bonds – which is never part of the original contract.
  3. The banks wanted actually to steal everything the Greek government had.
  4. The banks are still doing this – trying to get collateralization even ex post facto (after the fact).
  5. The strategy, however, is a dangerous one. The banks are holding large amounts of Greek debt; the French, for example, could be the most exposed. This debt, in turn, is insured by the legacy banks in New York through CDS (credit default swaps). These banks then transfer the risk by parceling it out to many insurance companies.
  6. The higher the yield goes (it is over 100%) and the lower the value of the security, the more power the banks think they have to try to get collateral from the Greek government to offset their losses. The banks have agreed to take 21% of the total losses; whereas they should be taking the whole thing.
  7. The politicians, whom the banks control, have stepped in and said. “You take the 21%, we’ll take the rest”,  meaning the taxpayer will take the remainder of the loss.
  8. This is what the good bank/bad bank spectacle is all about. The public will assume the debt to pay off the private banks, who started this whole process in the first place.
  9. If the banks want to make the Greek bonds go one way or the other, they can do that through the ECB (European Central Bank). The ECB miraculously found 100s of millions of dollars. They got it through a swap operation for $500 million with the US Fed weeks ago. What are they doing? They’re buying Spanish and Italian bonds to shore up the markets and keep the interest rates down, because there is mega-refinancing coming up for all banks – and central banks.
  10. The compounding problems are unbelievable. The political and financial scene in Europe amounts to nothing more than dog & pony show, or smoke and mirrors. They are extending the problem further into the future. The Euro will go lower in value, perhaps to US$1.30.
  11. Meanwhile everyone in Europe thinks that they will get a deal, but even if they get one, the results will unequivocally come back to haunt them.
  12. This will lead to yet another stop-gap measure, until eventually they can conjure up the next war – and blame everything on that war.

End of summary, Part 2.

There is more to the story, and of course more sides to the story, such as protestations that Greece has been irresponsible and living far beyond its means for years. Then again, banks bear a responsibility in lending money it know cannot be repaid. And in conducting campaigns to malign the future of Greek solvency when they hold short positions, and so on.

My purpose in posting this Q&A, parts 1 and 2 was especially to draw attention to Canada’s position and its financial risk management practice.

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