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madness31
06-11-2011, 04:03 PM
US banks have just over $190 billion of exposure to defaults of Ireland, Greece and Portugal. A strong majority of this exposure is through default insurance sold. This is the same type of insurance sold by AIG that lead to the government coming in and bailing out AIG and the rest of the financial industry. A smaller percentage of the total is through direct loans to the governments of these countries.

Greece and Ireland are past the point of no return. It is simply a matter of when and in what form, not if they will default on their debt.

Given the leverage in the financial system losses of this magnitude would be devastating. Even if you assume the big players have hedged their bets and bought insurance against the insurance they sold there is still the question of whether the institution ultimately holding the liability will be able to make good on this insurance. Once one domino falls, whether a US institution or a foreign financial firm it will set-off a chain of derivative explosions.

The $190 billion figure is only direct loans to these countries and the selling of default insurance on this debt. It does not include default insurance on European banks that may go under or bonds/stocks owned in these potential bankrupt institutions. I do not have the figure on these obligations but I imagine they would add significantly to total US exposure.

The big question is when will this implosion take place? If you can time it right you can save yourself or even make a fortune. My guess is late this year or sometime next year but games can be played for quite awhile. Most likely a global recession will trigger the event as huge debt obligations on top of shrinking GDP will be the final straw. Austerity is already causing economic weakness in these countries so if you add on a shrinkage in the global economy you have a disaster. Do not invest in stocks or bonds of financial institutions. If you must have exposure to this sector find emerging market banks that limit loans and investments to the retail market and don't participate in global investment banking.

Anyone else have thoughts info on this topic?

Couple data links:

http://streetlightblog.blogspot.com/2011/06/betting-on-pigs.html

http://bis.org/publ/qtrpdf/r_qa1106.pdf

It might be time to once again separate investment banking from deposit banking. There are other possible solutions but that seems to be the cleanest. I suspect this will be implemented after the event unfolds.

bobbiemcgee
06-11-2011, 06:30 PM
If you want a laugh - or cry - google any major bank and the words "derivitive exposure".

GuyFawkes38
06-11-2011, 11:22 PM
One of the things that sucks about the Euro is that it makes it much more expensive to visit countries like Greece, Italy, Ireland, Spain, etc...

For the sake of travelers, I hope those countries exit the Euro.