The New York Times reports that the brilliant analysts at S&P have decided that if the banks that loaned all that money to Greece have to eat any losses, voluntarily or otherwise, S&P will call that a default. If they are correct, those who wrote protection credit default swaps (CDSs) on Greek debt would be forced to pay off on the losses incurred by buyers of protection. In an earlier article, In Greece, Some See a New Lehman, the NYT provided another scare article threatening catastrophe after a Greek default.
You’d think there was some kind of conspiracy to protect US and European banks and CDS protection writers from losses they richly deserve. I’m smelling Moral Hazard. Why should anyone care if they lose billions? These articles are designed to scare people, sort of the bankster version of those local TV teasers about lights showing crud on motel bed covers, trying to get you to watch their vapid talking heads.
As an opening shot, the NYT reports that European banks have been dumping Greek debt onto the European Central Bank and the IMF, which the NYT explains dumps the losses onto taxpayers. How that happens is a mystery to me. The ECB controls the Euro, and if anyone is worried about the IMF, central banks can print some money just for it. That is glib, but essentially correct, and it isn’t a catastrophe for anyone.
Second, a lot of US money market funds provide short term loans to European banks, which pay a somewhat higher interest rate that US banks, currently swollen with free cash from the Fed. We are supposed to be very afraid that European banks won’t repay that short-term debt. That warning came weeks ago, and the Fed has put contingency plans in place for this unlikely outcome. These loans are short-term, and at least some of it is repurchase agreements, meaning that the loans are collateralized in full. That isn’t a catastrophe, either. And if money market funds lose money, people will leave that industry and put their money back in US banks, which sucks, but again, not a catastrophe. And I bet there are trial lawyers who can bludgeon the money market fund managers into making people whole.
The third fright is credit default swaps. If S&P is right about the default, it will trigger money movements. The analyst Kash at The Street Light provides a very rough estimate of US CDS exposure on Greek debt of $35 billion, but that doesn’t seem to cover all the CDSs laid off on hedge funds and insurance companies. Maybe that will be a problem, but I’m sure it matters only to the losers, and not the winners. JPMorgan Chase has a pile of CDSs on Greek debt, no doubt, but it may have both long and short CDSs, so who knows if it has any net exposure. A lot of those CDSs are collateralized, which will mitigate any problems. Anyway, a little excitement is good for them.
Kash estimates that direct creditors, those holding Greek bonds, would eat 70% of the losses, and protection CDS writers would eat the rest. The total amount of Greek debt is about $480 billion. If holders of Greek debt eat say $120 billion, about 25% of the losses, CDS protection writers would pay off $36 billion. That isn’t a catastrophe. It’s fun for all of us to watch the gamblers pay off, or go whining to their new Tea Party friends for a bailout.
Why would we rob any of them of their just desserts? Especially when it is so obvious that the intent of the banksters is the actual destruction of the Greek government, to be replaced by the first true corporatacracy. The nation that gave rise to democracy can lead into the brave new corporate future.