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Yesterday
we assessed how elements of the financial media are either unbelievably lazy
or completely complicit in helping to maintain the illusion of success for
the Centralized powers (large governments and Central Banks).
Today we move on to addressing how the political class and Central Banks
are unable resolve debt issues in any meaningful way.
Going into its financial crisis in 2009, Greece had a GDP of $341 billion.
To put this into perspective, it’s roughly the size of the state of Maryland.
Greek debt was roughly $370 billion that year, giving Greece a Debt to GDP
ratio of about 108%.
It’s a strikingly small amount of money for a collective economy of nearly
$18 trillion (the EU). Indeed, Greece contributes only 2% of the EU’s total
GDP. And yet, the ECB working with the IMF has not been able to resolve
Greece’s issues.
Let’s let that simmer for a bit…
A Central Bank, working with the IMF was unable to resolve a debt
issue for a country that comprises less than 2% of the economy of which the
Central Bank is in charge.
How is this possible?
First and foremost, the ECB had little if any interest in Greece’s
well-being as an economy. For the ECB, the “Greek issue” was really more of a
“large European bank issue.” In that regard, the ECB was focused on one
thing.
That issue is collateral.
What is collateral?
Collateral is an underlying asset that is pledged when a party enters into
a financial arrangement. It is essentially a promise that should things
go awry, you have some “thing” that is of value, which the other party can
get access to in order to compensate them for their losses.
For large European banks, EU nation sovereign debt (such as Greek
sovereign bonds) is the senior-most collateral backstopping
hundreds of trillions of Euros worth of derivative trades.
This story has been completely ignored in the media. But if you read
between the lines, you will begin to understand what really happened
during the last two Greek bailouts.
Remember:
1) Before the second Greek bailout, the ECB swapped
out all of its Greek sovereign bonds for new bonds that would not
take a haircut.
2) Some 80% of the bailout money went to EU banks
that were Greek bondholders, not the Greek
economy.
Regarding #1, going into the second Greek bailout, the ECB had been
allowing European nations and banks to dump sovereign bonds onto its balance
sheet in exchange for cash. This occurred via two schemes called LTRO 1 and
LTRO 2, which were launched on December 2011 and February 2012 respectively.
Collectively, these moves resulted in EU financial entities and
nations dumping over €1 trillion in sovereign bonds onto the ECB’s balance
sheet.
Quite a bit of this was Greek debt, as everyone in Europe knew that Greece
was totally bankrupt.
So, when the ECB swapped out its Greek bonds for new bonds that would not
take a haircut during the second Greek bailout, the ECB was making sure that
the Greek bonds on its balance sheet remained untouchable and as a
result could still stand as high grade collateral for the banks that
had lent them to the ECB.
So the ECB effectively allowed those banks that had dumped Greek sovereign
bonds onto its balance sheet to avoid taking a loss… and not have to put up
new collateral on their trade portfolios.
Which brings us to the other issue surrounding the second Greek bailout: the
fact that 80% of the money went to EU banks that were Greek bondholders
instead of the Greek economy.
Here again, the issue was about giving money to the banks that were using
Greek bonds as collateral, to insure that they had enough capital on hand.
Piecing this together, it’s clear that the Greek situation actually had
nothing to do with helping Greece. Forget about Greece’s debt issues, or
protests, or even the political decisions… the real
story was that the bailouts were all about insuring that the EU banks that
were using Greek bonds as collateral were kept whole by any means possible.
This is why the ECB and the IMF failed to “fix” Greece. Indeed, the below
chart makes it plain that all of the bailouts didn’t actually do anything to
solve Greece’s debt problems: the country’s external debt has actually barely
budged since 2010!
Note that after a brief dip in 2011-2012, Greece’s external debts rose
right back to where they were in 2010 at the beginning of the debt
crisis. Moreover, because Greek GDP dropped along with its debt
levels in 2011-2012, the country’s Debt to GDP ratio has
effectively flat-lined.
In short… neither of the first two bailouts actually solved
ANYTHING for Greece from a debt perspective. Between this and the collateral
discussion from earlier, the evidence is clear: the ECB has no interest in
fixing Greece’s problems. Both bailouts were nothing but a backdoor means of
funneling money to the large European banks using Greek debt as collateral on
their derivatives trades!
Another Crisis is brewing. It’s already hit Greece and it will be
spreading throughout the globe in the coming months. Smart investors are
taking steps to prepare now, before it hits.
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