Day: August 8, 2015

Aug

2015

Greece’s Collapse Was a Reversion to the Mean… Who’s Next?

Because of the rampant fraud and money printing in the financial system, the real “bottom” or level of “price discovery” is far lower than anyone expects due to the fact that the run up to 2008 was so rife with accounting gimmicks and fraud.

The Greek debt crisis, like all crises in the financial system today, can be traced to derivatives via the large investment banks. Indeed, we now know that Greece actually used derivatives (via Goldman Sachs) to hide the true state of its debt problems in order to join the Euro.

Creative accounting took priority when it came to totting up government debt. Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn’t exceed 60 percent.

The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics…

“Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,” one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.

http://www.spiegel.de/international/europe/greek-debt-crisis-how-goldman-sachs-helped-greece-to-mask-its-true-debt-a-676634.html

The above story for Greece is illustrative of the story for all “emerging markets” starting in 2003: tons of easy money, rampant use of derivatives for accounting gimmick, and the inevitable collapse.

From a big picture scenario, in 2003, the global Central Banks abandoned a focus on inflation and began to pump trillions in loose money into the economy. Because large banks could loan well in excess of $10 for every $1 in capital on their balance sheets, global credit went exponential.

The effect was sharply elevated asset prices that greatly benefitted tourism-centric economies such as Greece.

As I stated in our issue Price Discovery:

If the foundation of the financial system is debt… and that debt is backstopped by assets that the Big Banks can value well above their true values (remember, the banks want their collateral to maintain or increase in value)… then the “pricing” of the financial system will be elevated significantly above reality.

Put simply, a false “floor” was put under asset prices via fraud and funny money.

Take a look at the impact this had on Greece’s economy.

Below is Greek GDP dating back to the 1960s. Having maintained a long-term trendline of growth the country suddenly saw its GDP MORE THAN DOUBLE in less than 10 years after joining the EU?

In many regards, this “growth” was just a credit binge, much like housing prices, stock prices, etc. By joining the Euro, Greece was able to borrow money at much lower rates (2%-3% vs. 10%-20%).

Rather than using these lower rates to pay off its substantial debts, Greece funneled as much money as possible towards Government employees (nearly one in three Greek workers).

As a result, Government wages nearly doubled to the point that your typical Government employee was paid 150% more than his or her private sector counterpart. Add to this a pension system in which retirees are paid 92% of their former salaries and you have a debt bomb of epic proportions.

In simple terms, Greece from 2003-2010 was an economic boom driven by incomes, which were in turn driven by cheap debt NOT real organic growth. Thus, the collapse in GDP was yet another case of “price discovery” in which asset prices fall to economic realities…

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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Best Regards

Phoenix Capital Research

Aug

2015

The political class and Central Banks are unable resolve debt issues in any meaningful way

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.

We are making 1,000 copies available for FREE the general public