Symbiotic is the word to describe good dependent relationships but the globalisation of financial services that we are seeing today seems more parasitic or virus like. The so-called relationships are more like an attempt at the world domino tumbling championship - one falls and they all fall, rather than being built on firm foundations.
Greece is in trouble. I appreciate that in the main the populace have done little to deserve it other than to buy in to the bubble of Euro membership. There are suggestions that they were "assisted" in meeting the criteria by the investment banking sector "re-structuring" the countries finances by re-categorising debt and effectively enhancing their debt to GDP ratio. How many more countries have followed the same path to satisfy the vanity and empire building of Brussels.
Interesting that they have also hosted the Olympics in recent times, and I wonder how much this has contributed to their current debt levels. In turn, what kind of a warning message does that leave for the UK.
Anyway, the question is will they, won't they? Will the Greek people support the proposed solution (I don't see any other on the table other than bankruptcy), or continue to fight the solution and start a second global contagion with a debt default?
Will France and Germany allow them to default and firebomb the Euro?
Personally, I am not sure which is the better of the two. Certainly one would stave off bankruptcy and maintain the Euro, but that only raises the question of who is next in line - Spain, Ireland, Portugal, Italy?
It seems inevitable to me that, if not this time, then eventually Greece will default.
I have left the UK off this list for the moment due to the Governments attempts to reduce its debt but it could surely do more, such as keeping to its election manifesto!
The scale of potential default is the piece of information I am trying to focus on, and the possible ramifications. In the past there have always been defaults with Russia, Argentina, Iceland, and Greece itself having trodden this path before. And with inflation you would expect each subsequent default to be bigger than the last.
Apparently, Greece owes euro$340bn (equivalent to 150% of GDP), with 70% held abroad.
The US is warning that default would trigger another credit freeze (as Banks stop lending to each other) along the lines of that triggered by the demise of Lehman brothers.
Would this situation be as toxic as that one? Lehman Brothers folded with $613bn of debt against "possible" assets of $639bn (questionable at best given the results of subprime, CDO investments etc).
But, surely it was the CDO's and similar investments that had run like viral tentacles across the globe as each investment bank bought into the bubble. And, it was this repackaged and hidden element that resulted in nobody knowing who was left holding the timebomb.
Surely, in this case the debt is transparent and the creditors known in which case, targetted solutions can be implemented.
I don't recall too much detail about the Russian default of 1998, other than that Russia did default on its domestic debt (not its international debt) and markets were affected.
It wasn't until much later that I began to understand the knock on to LTCM, who with their Blacks Scholes model were effectively buying up as much of Russia's debt that it could get its hands on.
Russia's problems followed on from an Asian defualt in 1997. So it happens a lot then.
Anyway, back to 1998, Russia's default hit the FTSE100 which fell from around 6000 to around 4500 (which can be seen in the chart below: courtesy of Digitallook) but then rebounded almost immediately to end the year around 6000.
For reference you can also see the smaller falls in 1997 triggered by Asia, and, of course, the natural disaster which was the 2008 credit crunch.
The big V in the middle was the tripple whammy of the tech bubble bursting, the September 11th tragedy, and the second Gulf war that followed.
Impossible for me to know how this will pan out or the scale of potential hurt given that some banks are still recovering their capital bases following 2008, or at least you would hope so.
There is still a significant risk that the great Ponzi scheme that is the bank re-capatilisation program has just been used to pay out bonuses and that this will find them all out once again!
On a more positive note, sovereign defaults in isolation, have been absorbed so it could be that markets are still a bit sensitive as the hurt of the last few years continues to leave red scars. That being the case history suggests that markets will recover in their own time but that being the case any falls might just yield an opportunity for the very bravest amongst us.
Related articles:
- www.reuters.com: Quick Guide to the Greek crisis
Personally, I am not sure which is the better of the two. Certainly one would stave off bankruptcy and maintain the Euro, but that only raises the question of who is next in line - Spain, Ireland, Portugal, Italy?
It seems inevitable to me that, if not this time, then eventually Greece will default.
I have left the UK off this list for the moment due to the Governments attempts to reduce its debt but it could surely do more, such as keeping to its election manifesto!
The scale of potential default is the piece of information I am trying to focus on, and the possible ramifications. In the past there have always been defaults with Russia, Argentina, Iceland, and Greece itself having trodden this path before. And with inflation you would expect each subsequent default to be bigger than the last.
Apparently, Greece owes euro$340bn (equivalent to 150% of GDP), with 70% held abroad.
The US is warning that default would trigger another credit freeze (as Banks stop lending to each other) along the lines of that triggered by the demise of Lehman brothers.
Would this situation be as toxic as that one? Lehman Brothers folded with $613bn of debt against "possible" assets of $639bn (questionable at best given the results of subprime, CDO investments etc).
But, surely it was the CDO's and similar investments that had run like viral tentacles across the globe as each investment bank bought into the bubble. And, it was this repackaged and hidden element that resulted in nobody knowing who was left holding the timebomb.
Surely, in this case the debt is transparent and the creditors known in which case, targetted solutions can be implemented.
I don't recall too much detail about the Russian default of 1998, other than that Russia did default on its domestic debt (not its international debt) and markets were affected.
It wasn't until much later that I began to understand the knock on to LTCM, who with their Blacks Scholes model were effectively buying up as much of Russia's debt that it could get its hands on.
Russia's problems followed on from an Asian defualt in 1997. So it happens a lot then.
Anyway, back to 1998, Russia's default hit the FTSE100 which fell from around 6000 to around 4500 (which can be seen in the chart below: courtesy of Digitallook) but then rebounded almost immediately to end the year around 6000.
For reference you can also see the smaller falls in 1997 triggered by Asia, and, of course, the natural disaster which was the 2008 credit crunch.
The big V in the middle was the tripple whammy of the tech bubble bursting, the September 11th tragedy, and the second Gulf war that followed.
Impossible for me to know how this will pan out or the scale of potential hurt given that some banks are still recovering their capital bases following 2008, or at least you would hope so.
There is still a significant risk that the great Ponzi scheme that is the bank re-capatilisation program has just been used to pay out bonuses and that this will find them all out once again!
On a more positive note, sovereign defaults in isolation, have been absorbed so it could be that markets are still a bit sensitive as the hurt of the last few years continues to leave red scars. That being the case history suggests that markets will recover in their own time but that being the case any falls might just yield an opportunity for the very bravest amongst us.
Related articles:
- www.reuters.com: Quick Guide to the Greek crisis
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