Inkwell Institute

European Desk

World Economy/Economic Crisis

First of all, I am not the only person that sees the possibility of a total collapse of the economy in the future……we have been burned, economically and the fire is NOT out and it will be hotter the next time we get burned……

By now anyone interested in economics has heard or seen the reports on the problems in Greece….their economy is on the verge of collapse and if it does some of European will go with it……

For those interested:

Credit default swaps are insurance-like contracts that permit banks and hedge funds to place bets on whether or not a company, or even a country, will default on it debts. The nature of CDS trading, which is unregulated, is such that CDS speculators have an incentive to push companies or countries toward bankruptcy. According to one analyst, “Its like buying fire insurance on your neighbor’s house—you create an incentive to burn down the house.”

The role of CDS trading has been highlighted in relation to the financial crisis of the Greek state. Attracted to the highly indebted Greek economy like vultures to a decaying corpse, the CDS traders at major banks and hedge funds have moved in. According to the Depository Trust and Clearing Corporation, trading in credit default swaps linked to Greek debt has surged over the past year.

The overall amount of insurance on Greek debt hit $85 billion in February of this year. One year earlier, the same figure stood at $38 billion. The surge in such types of trading invariably drives up the cost of insuring Greek debt. The cost of insuring Greek bonds nearly doubled in February compared to early January. This, in turn, worsens the budgetary plight of the country and brings closer the specter of default—and a jackpot for CDS speculators.

The list of world players in derivatives and CDS trading is headed by the US banks JPMorgan Chase, Citibank, Bank of America and Goldman Sachs. According to the Office of the Comptroller of the Currency, United States banks held a total of $13 trillion in notional value of credit derivatives at the end of the third quarter of 2009.

US banks, however, are not alone in such trading. A number of Europe’s biggest banks, including Credit Suisse Group, UBS, Société Générale, BNP Paribas SA, and Deutsche Bank, are amongst the biggest buyers of swap insurance. Their activities on the derivatives market reflect their exposure to the Greek economy. The Bank for International Settlements reports that French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, and German banks, with an exposure of $43.2 billion.

Now Greece has had to make many concessions to the EU and the world, in an attempt to sure up the economy and try desperately to avoid a total collapse…….

It is increasingly doubtful, however, that Greece can obtain loans on American or Asian financial markets. The Daily Telegraph cited Simon Derrick of Bank of New York Mellon: “China is becoming concerned about Europe. Greece is going to struggle to find anybody to buy its debt. There is no road-show in Asia, and it may pull out of its show in the US.”

Moreover, financial commentators increasingly anticipate that Greece will be unable to repay its debts, even with European or IMF loans. While a joint European-IMF bailout of roughly €45 billion has been discussed, German central bank governor Axel Weber recently said that €80 billion might be needed. He told a closed-door meeting of German lawmakers that Greece’s position was worsening and “the numbers are changing all the time.”

In a Financial Times column, Wolfgang Münchau wrote: “Greece has a debt-to-gross domestic product ratio of 125 per cent. Greece needs to raise around €50 billion ($68 billion, £44 billion) in finance for each of the next five years to roll over existing debt and pay interest. That adds up to approximately €250 billion, or about 100 per cent of Greek annual GDP.” He concluded, “The best thing you can say about the rescue package is that it buys time to negotiate an orderly default.”

Greece has tried several things that involves the people making sacrifices but not the banks that have caused the problem…….

More than 10,000 civil servants and students marched to parliament, calling for cutbacks to be scrapped, beating drums and chanting: “No more illusions, war against the rich.”

Nurses, teachers, tax officials and dockers stopped work during the 24-hour strike, which paralyzed public services, while EU and IMF officials met in Athens for talks that could lead to a financial bailout for Greece.

Workers are protesting against public wage cuts, a pensions freeze and tax hikes imposed by the government to try to pull Greece out of a fiscal crisis that has shaken markets worldwide and driven Greece’s borrowing costs to a 12-year high.

You now know more about the problems in Greece and Europe than most of your elected officials….but you will no doubt ask……why?  Well sports fans you need to see what happens when a country’s economy collapses……why?  The way the US is going with its debt, in ten years this scenario could be playing out here and you will be warned…..but why would I say that?  Easy…NOTHING being done, by either party in Washington will control the risk of the CDS……since 2008, the banks have gone back to business as usual and the risk to the economy is STILL there waiting for the next glitch…..that will make them billions and drag the US economy down yet again……

UpDate:  Since I originally wrote this post there has been a further erosion of the Greek problem.  There bonds have been downgraded and are now JUNK!   And Greece has agree to more austerity programs and to raise taxes if they want the $145 billion carrot dangled in front of them…..now there is a novel idea….raise taxes to stem off any budgetary problems…..why did not someone think of that sooner (BTW that is called sarcasm)….BTW (again) it will be $8 billion of US taxpayer funds coming from the IMF……