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Archive for the ‘Bank Debt’ Category

Here and here are links to two very interesting readings about bank runs occurring in Greece and Spain. Why is the bank “jog” happening? In a couple of sentences, concerns about the safety of deposits. If you have deposits in a Greek/Spanish bank and the bank goes under, will you get your money back? What about if the country leaves the Euro — will you be paid in Euros or in the new, less valuable currency? Given the fears that either might happen, depositors are taking their Euros out of these countries to the banks of other countries.

What I think this bank jog is forcing, is a quiet but massive increase in the financial commitments of the ECB (Germany) to Spain and Greece.  The ECB is being forced to either lend to these banks or let them collapse; if they collapse, then Germany must decide to either lend to these countries or let them collapse/leave the Euro.  The loans are supposedly collateralized.  But the sheer size of the bank jog and the problems in these counties suggests that the collateral probably contains lots of bad collateral, like debt of sovereigns of questionable solvency and packaged highly-rated debt that should never have been highly rates.  That is, while we can call the current support loans, I suspect that many of them will be transfers (big transfers) in the case that these countries/banks do not grow and solve their fiscal imbalances.  How does it end?  It has to end when the banks run out of collateral that even the ECB in its most desperate hour cannot in good conscience lend against, and the banks start to collapse.  But it may end sooner, when some politicians have the good sense to finally pull the plug and default and devalue.

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The BBC has a very nice graphic here summarizing, for US, Japan, and Europe, the extent to which different countries’ sovereign and private bank debts are held by banks in each other country.  You can click on a country, see how much trouble it is in and which country is holding its debt and so would be in trouble if that country’s banks and government defaulted.  The graphic is missing information on assets (this is not net debt), but is still interesting.

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