Greek Default, Credit Event or Maybe Not

Reading time: 1500 words, 3.5 to 6 minutes

Greece is in the news again. Ho, hum!

We hear that Greece suffered a “restructuring credit event’ yesterday. Or, maybe not! The blogosphere is all atwitter with Greece being in default. Let’s put this into perspective; after all that’s what this website is all about.

First, Greece has been in default for years, it didn’t just happen yesterday. And it’s not the first time. They’ve defaulted half a dozen times in the last couple centuries. Today they’re broke again. They can’t pay their debts. They can’t pay their bondholders. They can no longer pay their government employees. They can no longer pay their pensioners. The last two groups haven’t quite figured out what insolvency means but they know something is very wrong which is why they’re rioting in the streets.

Second, Greece is not alone. Virtually every western country is in the same boat. The only difference is the size of their debt and Greece happens to be the popular target. Greece is just the designated decoy. They’re getting it good and hard (austerity) in order to deflect attention away from all the other countries. Greek debt is about 160% of their GDP. By way of comparison, Japan is 230%. Don’t tell the children.

Third, as I reported in 2008, Satyajit Das stated, “Governments are not really trying to save the system anymore … They now realize that’s impossible. They are just trying to manage the decline.”

Fourth, the so-called $3.5 billion in Greek Credit Default Swaps (CDS) outstanding is a joke. These CDSs are sometimes described as ‘insurance’ but that too is a joke. They are unrestricted, unregulated gambling by financial institutions who want to keep them that way, not to mention completely lacking in transparency (nobody know who has what). The so-called $3.5 billion is a drop in the bucket compared to what’s really at stake.

Fifth, remember the BIS – the Bank of International Settlements; the global central bank of national central banks – reported $1.4 quadrillion in outstanding derivatives about two years ago. Now, quite mysteriously they’re reporting ONLY $600 trillion. Gee, that’s only 10 times the size of the entire annual global GDP. But that’s not nearly as frightening as the “Q” number (quadrillion) which would make it MORE than 20 times the size of global GDP. Of course, they’re fudging the numbers.

Ok, I’ll stop counting now. So next, the entire market in CDSs is estimated at about $35 trillion. How much of it will be affected by the Greek so-called “Credit Event” is anyone’s guess. Why? Because it’s all un-regulated and completely dark. Nobody knows! Each financial institution has a pretty good idea how deep they’re into the doo-doo but nobody’s reporting and nobody knows how deep everyone else is in it.

Next, the so-called $3.5 billion CDSs covering Greece is a mere hundredth of one percent of $35 trillion outstanding global CDSs. That’s 0.0001. Or maybe thats a thousandth. No matter, it’s all BS. Given how interconnected and inter-twined the CDS market is; nobody in their right minds believes the $3.5 billion figure. Jim Sinclair estimates the real number is about half the $35 trillion. And, U.S. banks are deeply into the Greek doo-doo and the U.S. Fed will be called upon to again expand its bloated balance sheet to surreptitiously bail everyone one. Sinclair calls it QE to infinity!

HOWEVER, everybody is going to PRETEND it’s so. And, this is how they kick the can down the road again. And, it will work until it stops working. And, then it all goes crash, ka-boom! When will that happen? Nobody knows.

There’s no end of pretending. The so-called “credit event” was announced by the International Swaps and Derivatives Association (ISDS). They sound official but, remember derivatives are unregulated. The ISDS is a trade association. That’s right, they represent investment banks and financial destitutions oops, institutions. That’s right; they’re the foxes guarding the hen house.

Here’s how Bloomberg describes it, “Imagine you bought a house and, to insure it, you had to purchase coverage from the homebuilder.

“Then imagine a fire nearly destroyed the house, but your ability to collect the insurance depended on a committee of anonymous homebuilders meeting in secret to vote on whether to write you a check. If denied, the panel wouldn’t have to provide an explanation, you wouldn’t be allowed to review the minutes of closed-door discussions and you’d have no right to appeal.

“Not a great system. But not dissimilar to the one that governs the world of credit-default swaps, the contracts that insure sovereign- and corporate-debt investors against default.”

Even though, bondholders of Greek debt just lost 74%, the ISDS is not calling it a default because that would trigger the payout on all the CDSs. And nobody has the money to cover these payouts. Nobody!

The financial destitutions, oops, institutions that issued these CDSs are all broke. Just like everybody else. They enjoyed the commissions and bonuses for selling these Credit Default Swaps but they did that knowing, no, hoping they would never be called to task and hoping they could pretend their way out of it and hoping, in the final analysis that the worlds’ taxpayers would bail them out. Not gonna happen! Not enough money.

Ok, so why am I wasting my time writing about this? Thought you’d never ask. Do a little demonstration. Take a $20 bill. Hold it in both hands. Congratulations, you’re holding three cents worth of paper and ink. That’s what’s known as the intrinsic value of currency otherwise known as ass-wipe.

Once upon a time currency was redeemable in gold. Richard Nixon stopped that in 1971 and the rest of the world was forced to follow suit or else they’d have to redeem (pay out) all their gold reserves.

Once upon a time, currency proclaimed “Payable to the Bearer upon Demand”. Go to a bank today with your $20 bill and demand your gold. Good luck! They’ll look at you funny. Nowadays, currency proclaims, “This note is legal tender”. Do you know what that means? It means nothing. It means that it’s official, government sanctioned ass-wipe.

However, it still works, at least, for now. It works because we have not yet lost all confidence. It works because you are confident the store-owner will accept 3 cents worth of official ass-wipe because he has confidence the next person he offers it to will also accept it and so on. All of our financial institutions, contracts, currencies, everything, the whole enchilada is based on confidence.

If you took chemistry class in school, you might remember the experiment where you kept adding a drop of chemical to a solution until it reached saturation and the whole beaker precipitated into darkness. The same thing is happening with confidence. We keep adding drop after drop of lies and bullshit until we reach saturation. Then it all goes dark.

– In 2009 the U.S. Financial Accounting and Standards Board caved in to Congressional pressure and debased accounting from Mark to Market (i.e. valuing assets by what they’d sell for) to Mark to Myth (i.e. value according to whatever the too-big-to-fail banks want).
– Then markets were flooded with bank bailouts driving a speculative frenzy.
– Then 0% interest kept inflating bursting bubbles and destroying savers & pensioners.
– Then AAAAA+ was given to bankrupt companies and insolvent countries.
– Then high frequency equities trading was allowed to distort price discovery and make investing for the future meaningless.
– Then paper trading in gold & silver was allowed scores of times greater than the actual metals available for delivery enabling the manipulation of prices.
– So why shouldn’t the ISDA pretends a 74% loss to Greek bondholders is not default but invents the term “structured credit event”?

Drop by drop. When do we reach saturation? No one knows. But, when it happens it will be sudden; just like the beaker in chemistry class. It all goes dark. And we’ll all be surprised.

Look for me. I’ll be the fellow with a bit of blood dribbling down my chin from biting my tongue to avoid saying, “I told you so”. Then, I’ll keep my mouth shut because nobody likes a smart-ass.

Until then, I’ll keep haranguing you to do the things that regular readers of this blog have read about endlessly.

Got gold? Got silver? Got out of debt yet? If not, then three strikes; you’re out!

Stay tuned.

March 10, 2012
Two posts in one day! I need to get a life!


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About gerold

I have a bit of financial experience having invested in stocks in the 1960s & 70s, commodities in the 80s & commercial real estate in the 90s (I sold in 2005.) I'm back in stocks. I am appalled at our rapidly deteriorating global condition so I've written articles for family, friends & colleagues since 2007; warning them and doing my best to explain what's happening, what we can expect in the future and what you can do to prepare and mitigate the worst of the economic, social, political and nuclear fallout. As a public service in 2010 I decided to create a blog accessible to a larger number of people because I believe that knowledge not shared is wasted.
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