From Landon Thomas at the NY Times: In Greece, Some See a New Lehman:In a nutshell, it means that the international finance community has been playing with Credit Default Swaps around the Greek and Eurozone debt situation (Calculated Risk pointed readers to other information which clarifies why this matters).
Bond traders and officials at the European Central Bank have been unified in their warnings that a restructuring of Greece’s debt would set off an investor panic similar to the one that followed the bankruptcy of Lehman Brothers.
... if they are forced to take a loss, and the ratings agencies declare Greece in default, investors [might] start selling in a panic. And they [might] not sell just the bonds of countries struggling with debt — Portugal, Ireland, Spain and Italy.
...
According to a recent report by Fitch, as of February, 44.3 percent of prime money market funds in the United States were invested in the short-term debt of European banks.
...
Citing recent data from the Bank for International Settlements, the blog points out that in the event of a Greek default, direct creditors would be on the hook for 70 percent of the losses, with credit default insurance picking up the rest. Thus, if one includes credit default exposure, American exposure to Greece increases from $7.3 billion to $41.4 billion [Emphasis added].
Thomas', uh, "money quote" described the current situation as
... though banks and other investors have done much to pare their Greek holdings in the last year, if they are forced to take a loss, and the ratings agencies declare Greece in default, investors would start selling in a panic. And they would not sell just the bonds of countries struggling with debt — Portugal, Ireland, Spain and Italy. In a hasty retreat into cash, traders would unload more liquid assets as well, everything from high-grade corporate bonds to American and emerging market equities — as occurred in 2008 after Lehman failed.The chance that Markets can plummet is always present in a complex structure of interrelated and interdependent finances and obligations -- but the likelihood that it will happen rises as major players in that system take on more risk... meaning, they get greedy, and sloppy, dealing with other people's money. And it's always been easier for that crowd to take risks with what isn't theirs.
Between 1998 and 2007, America created a gigantic time bomb in the form of a real-estate, credit-swap, Mortgage-Backed-Securities Ponzi scheme -- in addition to the suicidal idiocy of Lil' Boots' tax cuts and an utterly unnecessary invasion of Iraq; a mountain of hidden debt was created in those short, "Go-Go" Bush years. The 'Market', that weirdly half-mythical beast which lives in the basement of our consciousness, has been living in the shadow of that debt ever since.
One great truth about the 'financial crisis' (though that term doesn't seem adequate to describe it) is that the Trillions in debt that were created are still hiding on the balance sheets of banks and investment houses around the world -- and that governments and the global finance sector have been engaged in a desperate attempt to stave off A Reckoning, find some overall solution to resolve, "unwind" all that debt ever since.
However, it's not simple. Think of a series of interconnected sculptures made from rocks, precariously balanced on each other. The more complicated the system, the more opportunities for an "event": The situation with Greece could be the stone that slips, the electron that breaks free and trips the chain reaction that I feel analysts have been dreading since the Crash of 2008 -- and many had predicted this crisis, years in advance.
Perhaps now it's a little clearer why the Wealthy© have been grabbing all the money they can get their hands on, as quickly as possible... because if Greece's debt can't be dealt with -- and Portugal's, and Spain's, and Ireland's -- then it's possible that the Great Depression, and global political instability of the 1930's, will end up looking like a lawn party by comparison.
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