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For a Civic and Constitutional Republic 


Issue No 93 Friday 22 February 2012

This Week


News Stories

Highlighting news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.

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Peter Kellow writes

The six point plan announced today to address the Greek debt crisis is said to share the pain. In reality it is the abject humiliation of a nation in an attempt to try to save the banking system

Let's look at the history of what happened that has put us in this mess

The European banks, mainly French and German, bought up Greek bonds in the knowledge that Greeks would not be able to repay (it was pretty obvious to everyone).

They did not need to worry about this for they knew they could come to the European governments for a bailout when the inevitable default occurred. In the meantime they could collect massive interest payments, commissions and bonuses on the loans

However, their ploy had another aspect to it.


The banks took out what is politely called “insurance” (credit default swaps) on the possibility of Greek failure.

What this meant in reality is that the party (the counterparty), providing the “insurance”, itself made a bet that they wouldn't have to pay out because the European governments (tax payers) would bail out the banks to prevent them from going bust when Greece cannot pay its debts.

The counterparties are themselves mainly banks and so the scenario arrives where the banks who lent to the Greeks and the banks that insured the debt get off scot free and retain all the profits and commissions they made on the bet while the tax payers are crucified again

That was the plan and it could still work out that way.

What the six point plan now hatched attempts to do is to avoid this scenario happening – or at least delay it.

A key element is that the lending banks are taking a VOLUNTARY “haircut” or loss. This takes the loss out of the swaps contracts for, of course, insurance only pays out on accidents, not on events you caused yourself

This leaves the relationship between the lending banks and the European governments standing alone (for the present). The governments are, with the current plan, making a last ditch attempt to get the Greeks to repay their debts, even if only partially, to avoid seeing the banks go to them and their tax payers for a bailout. At the same time it avoids the swap contracts being redeemed so avoiding further mayhem in the world banking system

To recap, the most important aspect to appreciate in all this is that the banks have cunningly constructed this situation by

  1. Making loans to the Greeks they knew could not be repaid
  2. Other banks giving “insurance” knowing that they would not have to pay out because governments would bail them out to avoid them failing

Banks have been found guilty of many horrors in the past few years. But they have not changed except they have learned how to play the game with governments differently.

What will happen? The Greeks cannot possibly pay. Even if they wanted to, the austerity measures will send the economy further and further into recession making it mathematically out of the question that they could pay. As I reported in Newsletter No 71 24 June 2011 they will default.

There are many (including Tory grandee, John Redwood, speaking on Newsnight a few days ago) who recommend they do this sooner rather than later.

When this happens, they will default on ALL their debts. This will not be able to be disguised as not being an accident and so the credit default swaps will be called in. The sums are too huge to be paid by the counterparties (as everyone well knew when the swaps were agreed) and so they will also be put at risk. So we will be looking at global banking meltdown.

Except that will be postponed again for a while as the counterparty banks (and their reinsurers) will be bailed out as they correctly calculated they would be.

They have a good precedent to base this calculation on, for this is exactly what happened when the American insurance giant, AIG, was taken into public ownership in 2008 to avoid Goldman Sachs, who had massive derivative contracts with them, going to the wall

This nightmare scenario has scared the European governments into straying into the unreality of the present six-point plan and so they can pretend for a few more weeks that the situation is resolved. They simply do not know what else to do

But as Roche and McGee wrote in their indispensable “New Monetarism”:

“the grim reaper of reality never rides far behind the fair maiden of delusion for very long”


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