The never ending Greek tragedy goes on and on, with bail outs, austerity demands (codespeak to screw the poor and middle class), and votes of no confidence in government officials. All of this raucous is interspersed with violent protests. Now Europe is in talks for a second bail out, about the same as the first one, or $157 billion.
The EU and ECB refuse to let Greece default and insist the new bailout should guarantee no adverse credit event. Greece's debt is now about 150% of annual GDP, heading to 160%, or $485 billion, with some estimates of Greek debt being $532 billion. Add to this, Greece's economy is shrinking, which will never enable them to pay off this debt. This is what austerity brings, social unrest and a non-productive economy, as the Prime Minister tries to blame inept workers.
Below is a graph of countries' exposure to Greek debt from BBC news.
Yet, Economist Kash Mansori did a little more digging and found the United States exposure to Greece debt much higher, $41.4 billion and that's just Greece.
Mansori has done more work in trying to ascertain U.S. bank exposure to the European debt crisis and received quite a bit of denial blow back as financial stocks declined in response. Bottom line, he stands behind the $41.4 billion of Greek crisis U.S. exposure.
In other words, the BIS data does indeed represent true net exposure, and in the case of US banks that exposure is about $40 billion to Greece, on par with the exposure faced by banks in France and Germany. No, we don't know exactly how much of that takes the form of CDS contracts, but we do know that the exposure is there.
Buried in a never ending series of Greek bail out stories, we have plans for a non-default default of Greek debt. Why? So, credit default swaps are not triggered, in part. The official party line is credit default swaps are currently valued a €5 billion. Yet here is the pressure to avoid default.
Citigroup highlighted in a research note that such a move could undermine the use of CDS as a tool to hedge against sovereign risk more generally.
While Citigroup and other U.S. banks are pressuring for Greece to avoid default, for then they would have to pay out on CDSes, €5 billion, in the big scheme of things, is not that much. Considering the games being played, most of it on the backs of working people in the forms of austerity, the odds are Mansori's estimate is correct.
Remember that shtick how the taxpayers had to bail out the banks in order to save the economy for working people? Remember how banks would lend to small business and individuals? Right o, we know that banks did not do that Instead, they appear to have re-entered the great derivatives gambling hall by placing bets that Greece would be bailed out.
So, what exactly is keeping Greece from being able to default on some of it's debt? The banks. Even the interest on the debt, now currently 6.6% of GDP, projected to be 8.8% of GDP by 2014, isn't being forgiven.
We have a never ending spiral of bail outs, social unrest and a never ending shrinking Greece economy, double whammied due to austerity demands and interest on the debt. This never ending saga is now to be stretched out, like picking at a scab underneath a band-aid, instead of getting the pain done and over with in order to help Greece actually economically recover.
What was that phrase half measures availed us nothing? Maybe the phrase should be modified to say half measures availed us more time to make flash trades and pull in premiums before impeding doom hits.
Tune in for the Next Stop in the European Debt odyssey - Off to Circe! ~