February 25, 2012 in Finance
Much of Greece’s current debt is owned by the European Central Bank, the European Union, and the International Monetary Fund. The major investors in this “Troika” are mostly American Banks. This includes JPMorgan Chase, Citigroup, Bank of America, HSBC, and Goldman Sachs.
All indicators say that Greece will not be able to make March’s bond payment. Therefore, the debt will be discounted by fifty to seventy percent. The logic is that some payment is better than no payment.
When this logic was used last October, it took down MF Global.
If it happens again in March, it may take down the entire Troika and its investors.
The Troika, like MF Global did, has a large interest in European bonds. In addition, they have purchased derivatives (insurance) on these investments. JPMorgan Chase, Citigroup, Bank of America, HSBC, and Goldman Sachs willingly took the derivative premiums.
If you think about this situation, you can see the problem.
The American banks insuring the investments of the Troika are the same American banks invested in the Troika.
If Greece discounts its bonds, this will cut the asset base of these three International banks and reduce the asset base of the five American banks.
Then, the Troika will turn to the American banks to cash in on its derivatives. However, the American banks will not have the funds to pay the insurance claims.
If the banks can’t pay the insurance claims, they become insolvent.
When this happened to MF Global, the company went bankrupt and its clients lost 1.2 billion dollars. While this may seem like a lot of money, it is just the tip of the iceberg compared to the situation I just described.
The MF Global situation didn’t matter to the banks. Therefore, they changed the rules and didn’t honor MF Global’s claim. They didn’t pay according to the derivative agreements.
They didn’t pay so they could save their own skin.
Now, their skin is on the line.
The last time this happened, Lehman Brothers and Bears Sterns went to The Fed, through the United States Government, and asked for a bailout. President Obama used his State of Union Address to say the answer will be “no” the next time the banks ask.
So, what will happen this time?
No one knows for sure. Anything is possible, including the violation of international law.
In fact, the European Central Bank has already changed the terms on their Greek debt. Their ignoring of the rule of law has contributed to an already unstable environment.
I suspect we will see more of this as bankers do everything they can to add time to this ticking time bomb.
My opinion is that this bomb will explode. When it does, the entire European banking system is at risk and, with it, the largest five banks in the United States.
What is the peaceful response to this? I’ll write about that starting tomorrow.
The following stories provide more information on this situation.