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COLLAPSING POLITICAL SUPPORT THREATENS EU, SYSTEMIC RISK THREATENS WORLD

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 A short summary of the key points of the EU debt crisis, where it’s obviously headed, and ramifications for investors and traders

Per a Reuters article Wednesday, EU banks are stuck with over 100 bln euros of Greek government debt they’re unable to sell, hedge or ignore. However the ECB is in the same situation, and holds so much Greek debt that a default would mean the ECB would need a bailout.

No one wants to buy the bonds even at record low prices, and insuring the debt is too expensive to be worthwhile.

Thus the banks, at least the big ones, can do nothing but hope that when the default comes, be it full or partial, they will be bailout out along with the ECB as an unavoidable step to maintaining economic stability in the EU.

That will mean, one way or another:

Lots of money printing, a falling EUR and thus likely a rising USD

  • Considerable political turmoil as politicians face angry voters seeing their tax money used to bail out private investors and preserve bank executive bonuses

Greek domestic banks have the largest exposure by far, with ~ 50 bln Euros exposure per estimates. Another 50 bln is held by other EU banks, lead by German banks (19 bln Euros) and French banks (15 bln Euros).

Of course, the above doesn’t even consider how a Greek default would likely push other PIIGS borrowing costs so high as to threaten additional sovereign defaults, more bank losses, bailouts etc.

Many have noted that the real danger is that a Greek default becomes a systemic crisis, i.e. one in which banks don’t know which other banks are in trouble so that interbank lending shuts down and economies risk collapsing due to lack of credit and liquidity.

Remember, the mere collapse of one major bank, Lehman Bros, was enough to kick off such a crisis – back when the world economy was stronger, less indebted, and markets were calmer.

Given the risks we believe that there will ultimately be a major international effort to prevent such a crisis. However it’s unclear when that will happen and how far markets and the EUR will sink in the meantime.

But Will EU Voters Accept The Pain?

Complicating the task is a growing ‘bailout exhaustion’ as political opposition grows in both debtor and funding nations to the bailout & austerity programs. Citizens of the core economies are growing tired of seeing their tax money thrown down a bottomless pit, and the populations of nations receiving bailouts are increasingly opposed to austerity budgets and loss of sovereign control over their spending.

Indeed, the biggest danger to the EZ may well be that at some point sooner or later, the bailout/austerity program disintegrates as one or more nations opt out of bailout payments or their austerity obligations.

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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?
 


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