Secret deal on letting Greece go bust at the Paris summit?
Posted on 17 August 2011 with 5 comments from readers
Meetings of European leaders are always more important for what is not said in the final communique than what is said.
What we got yesterday was a rejection of eurobonds – the only viable solution to the eurozone debt crisis – and some nonsense about a tax on financial transactions that was previously rejected as unworkable.
So what was said behind the scenes? We can only guess. But what the rumor mill is spreading is that Germany and France have decided to let Greece go.
Euro-logic
There is both gallic and teutonic logic to this. Eurobonds are unacceptable now because the financial crisis is not sufficiently bad to push the dissenters behind this action. Greece is univerally loathed for its misbehavoir.
Letting Greece go bankrupt and exit the eurozone will solve both problems: the huge financial crisis it will precipitate for the European and US banks who will have to write-off hundreds of billions in bad sovereign debts, will leave them crying out for eurobonds; and getting rid of Greece will be popular all round in the EU.
However, letting Lehman Brothers go bankrupt three years ago precipitated the greatest global financial crisis since the 1930s. Would letting an entire country go under not have a similar contagion effect? It is a big risk that the cautious Mrs Merkel will likely find a career breaker.
The US Treasury thought the impact of Lehman would be limited, are the EU leaders about to make the same mistake? Or do they have their own eurobond integration agenda that demands a blood sacrifice?
It is certainly hard to believe that Angela Merkel and Nicolas Sarkozy did not get to the nub of the eurozone debt crisis in their summit at the weekend, and the absence of Greece from the final communique perhaps speaks volumes.
No Greek tragedy
Ironically for Greece exiting the euro would be the best thing that could happen. A sovereign nation is not like a Wall Street investment bank. It cannot be closed down. Life must go on.
Outside the euro Greece could devalue and instantly become very competitive again and attract even more millions of visitors to soak up its sun and history. Those Greeks who already have their billions stashed abroad could invest at a massive discount and flood the country with liquidity.
The losers will be the European banks with the massive write-offs, and the winners will be the eurobonds that everybody will quickly accept as absolutely essential. But only after part two of the global financial crisis.
The investment conclusions: sell the euro, buy dollars and US treasuries, short the banks, buy gold and silver. The next edition of the ArabianMoney investment newsletter will consider this is more depth (subscribe here).
5 Comments posted by readers:
“Letting Greece go bankrupt and exit the eurozone … the huge financial crisis … will precipitate for the European and US banks who will have to write-off hundreds of billions in bad sovereign debts … ”
- BUT … don’t forget the CD’s that would be triggered by such a default.
Does anyone know the exact (CD’s liabilities) figure at risk?
Q: if indeed the Big Plan is to sink Greece then the mystery is as to why certain banks have been writing down their Greek debt i.e. why not wait till the plug is pulled and claim on the CD’s?
If anyone can work this one out – please let us know
I understood John Embry, chief analyst at Sprott Asset Management, say that there could be QUADRILLIONS of dollars of CD debt out there but, of course, no one knows.
I can’t answer your second question. Maybe the losses from Greece are trivial compared to CD debts, but I’m not sure that this answer makes any sense.
Peter stated: “The investment conclusions: sell the euro, buy dollars and US treasuries, short the banks, buy gold and silver.”
Absolutely agree with that, Peter! (… but buy only the short to intermediate term US treasuries). And while I agree that Eurobonds are a “solution”, I’m not convinced that enough Europeans will snap them up.
@ dscartes::
CD’s? Do you mean CDSs (Credit Default Swaps)? If that’s what you’re referring to, I think I can dig up some data that’s a month or two old, that quantifies the extent to which these banks are on the hook.
In summary, several of the US banks (notably GS, JPM, Citi and BAC) were selling tons of CDSs to Europe from 2009 to early 2011, to provide insurance against Greek defaults. And my recollection was that those US banks would lose almost as much as the big German and French banks. I’ll try to find the specifics tomorrow.
Bottom Line: short BOTH the Euro banks as well as the US banks.
thanks for the heads up, guys
Quadrillions worth of CD’s … the full extent of which nobody is sure?
That says it all.
The point I’m trying to make to the author of the article is that he should include the likely scenario resulting from his thesis i.e. wherein the big boys dump the troublesome minnows.
In Janet & John speak: if, for whatever reason, Greece is deemed to be in default resulting in the CD’s being ‘activated … then the systemic risk to EuroBlob borders on Armageddon … n’est-ce pas?
In the end, Europe will print more euros. If not, the US Federal Reserve might be forced to lend them some US funny dollars, made in cyberspace. (In a REAL crisis, we’ve got an infinite supply of them. Don’t tell anybody.) I seriously doubt that the US Government will sit by and watch Europe melt down. That would be rather dumb, since Europe is the largest economic block, with many big American companies doing a significant proportion of their global business there. A couple of giant European bank failures could set off a cascade of insurance policy redemption (remember the AIG credit default swaps mess?) that could wreck the entire world banking system within a day or two.
But I could be wrong. Those politicians aren’t exactly rocket scientists.
The US Government has suddenly developed an interest in investigating Standard and Poor’s. What a coincidence!