Greeks' upper hand

Greece is bust but no one formally admits that: i.e. there is no credit event as yet. There is an unusual resistance to face the obvious reality. On one argument why Greece should not go bust is that it would give a "bad" example to other countries that restructuring debt through default is the best for these countries at the costs of creditors. The other argument, not voiced that openly, is that currently a lot of debt is held by private banks (mainly in France, Germany and the UK) if Greece goes bankrupt, these private banks would face liquidity crunch, like or even bigger than at the end of 2008, and would require "rescue" packages from the taxpayers. This, in turn, would undermine the public trust in banks. It is impossible to predict the effect but a massive run on the banks is quite realistic then. Indeed justified. So the process of "rescuing" Greece is in fact an exercise of shifting their debt from private banks' books directly onto taxpayers books. And when Greece will go under private banks will be in safe positions and the taxpayers will get the hit directly. In other words it is a pathetic pantomime played to the public that banks are safe and prudent institutions to keep confidence in them.

However there is the third possibility. It is quite certain that behind many billions of euros lent to Greece there were many CDS' sold on the back of it. The Greek debt CDS market is vibrant.The European Central Bank should make it clear (down to at least 1 billion euro) how many billions of euros would have to be paid if Greece defaults on their debt. It is quite typical for CDS' that they were sold many times over exceeding the underlying debt. Hence if Greece defaulted, i.e. triggered the credit event, then the liabilities of some banks and financial institutions to the counterparties that bought CDS' may be many times (10, 20, 100 times or more: make your own guess) more than the Greek debt (going into trillions of euros). If that were the case then the financial system would go into the meltdown.

Greeks should ensure that they understand the CDS' position vis-a-vis their debt. If Greece is really such a store of toxic waste then they should use it to extract as much money as possible from the rest of the world that cannot allow them to go bust. Indeed some of these rescue loans they should use to insure many times over their own debt. So when the system collapses - as it eventually will happen - they would not be liable for their own debt but the counterparties that sold them CDS'. The financial system is so dysfunctional now, and the bankers are so greedy, that it should not be a problem to conduct such legitimate financial operations.

Incidentally there is nothing new in this analysis. This process, of toxic waste propagating through the financial system was predicted to follow the credit crunch of 2008 in the first article of this blog The largest heist in history written two and half years ago. It was clear already then that the financial system was at a state of utter dysfunctionality and stupidness.