Nope. Have not seem the numbers for a while but it think you’ll find Soc Gen and DB subsidiaries are pretty high on the list of net exposure on CDS like instruments on Euro zone bonds. Its not the Greeks or PIIGS they are worried about. My guess is it will be the increased collateral requirements on the inevitable downgrade cascade on other euro zone country bonds and related derivative instruments. Its collateral cash calls that finally killed AIG, Lehmans et al and increased collateral calls can come from the most unexpected directions. I dont think anyone is quite as naked as AIG was in 2008 but I suspect there is no more cash to cover a major collateral cash call. The cheapest solution by this stage is have the credit event, net out all the positions and for the ECB to stump up the 10B or 20B to cover the net losses. And then dont let the bastards write any more contracts on margin and have weekly collateral adjustments on all open positions.
Greece is brought through an ordered sovereign default to 30%/40% of current debts
Greece’s creditors fight over the spoils
Sovereigns (eg NTMA etc) have to shore up any losses from sovereign exposure to the Greek default. A “Greece default levy” is added to PAYE slips all over the world
ECB runs a “compensation fund” for any banks - Greek, French, Landesbank, non-European - affected
Geithner and Trichet get to isolate the Greek default and leave it to the next guy to tip over precarious banking/CDS house of cards (with Italy or whoever).
Greece itself will be put into a state of emergency. It will receive fixed funding amounts on short schedules and will not be permitted to go over, so there will be periods of blackouts etc. Possible anarchy, but the banks will be OK. And witnessing anarchy will dissuade the other PIGS from following the Greek example.
There will be no immediate effect on Ireland. The rules will be (1) The ECB rescues the banks in the event of a sovereign default. (2) The country rescues the banks in the case of a banking crisis. (There won’t be another banking crisis because of (1), but we’ll be stuck with the one we have.)
I’ll go dig up Soc Gen et al’s numbers. The AIG edgar was pretty interesting. Looks like a controlled liquidation. Should be all shut down in 3 or 4 years as all the contracts are let run out. The $65B notional would probably translate into < $1B real. Which by this stage in the game is how much the Fed loses down the back of the sofa after a particularly boisterous Friday evening beer bust.
Well, it always looks like the end of something bigger when your tiny rat-infested sewer collapses. Are Greece and Ireland systemic? Probably not. Are they symptomatic of what could be wrong in Italy and Spain respectively? That’s the concern, I reckon…
Put a couple of trillion into the worlds financial system to replace the couple of trillion that disappeared with the collapse of the shadow banking system. Who then promptly deposit it back into the central bank system.
The same thing happened back in the 1930’s.
That’s why the hyper-inflationists get it so wrong. They have a very simplistic model of how the real world works. Lots of money printed is not equal to huge increases in general prices. There again, so do the central bankers. Huge amounts of liquidity do not solve debt solvency problems. Which is why the massive liquidity injections by the central banks in the 1930’s did not work either.
Don’t panic. We must be careful not to talk ourselves into an early winter. Mr. Olli Rehn said nice things about the Irish climate so there you go. The Happy Gilmore index is at ninety, so you should all stop worrying and go out and spend money.