Sunday, 26 June 2011

Fiscal Woodworm

For some months now, many in the independent blogsphere have been pointing eastwards and telling anyone who would listen that despite the absence of mainstream media coverage, that they might want to take a more detailed look at the Greek crisis. The view in our media up until recently was the occasional piece of coverage of some violence to spice up otherwise dull news bulletins, but any time the question came up of would the problem hit Britain, supposedly all knowing people would say that we are immune from it. 

Eventually, the magnitude of the problem would burst the dam of ambivalence in the media coverage when it could no longer be hidden.  The coverage is growing by the day.  There is however still a narrative running through the story that somehow we're okay whilst others are pointing out that we too will crash into rocks also.  For the average person like me it can create a confusing picture.

I therefore urge you to read this post on the Golem XIV blog.  I don't always agree with his output but I think this shows us something that should very much concern us all as he explains the accounting games that are played with money to make banks look stronger than they are. It helps explain the nature of the problem that is hidden by the waffle of punditry and experts trying to sound knowledgable. It is always worth noting this post when you hear our pundits talk about the assets a bank has and how that protects them.

In short, the system is riddled with a fiscal woodworm.  The structures that appear strong are significantly exposed to something that continues to devour its supporting structure and its weaknesses are being presented as it strengths. 

So let's take a look back at Golem's page and this quote in particular:

All banks are required to hold capital against their loans. The problem is that with leverage it only takes a small loss to destabilize very leveraged banks. And yet the banks remain leveraged and our politicians have done little or nothing to change this.

Golem has painted a dark picture of the problem of the banks being leveraged by working to a policy of growth fuelled by debt.  For the purposes of the example he has used a leverage ratio of 10:1 in others words every dollar / pound or Euros of assets to loan ten times that.

It is wise not to brush over his comment that the reality is more than that.

If you look at this report it is quite clear that Germany, France & Belgium are loaning on a much bigger ratio, with BG not far behind.  Germany & France are into Greece quite deeply.  If Greece goes belly up they will take a hit.

Mervyn King has finally alluded to the nature of the problem for Britain but its one that affects many global markets as well but wasn't clearly spelled out and has been avoided by the press for some time.  The Greece situation isn't just about the bonds that we keep hearing about.  It is also about the interbank lending. The banks are endlessly shuffling money between each other to finance each others activity. Many may recall early on in the global downturn about the locking up of the money supply as banks ceased loaning to each other as they had been doing which brought its own problems.

Given what we learn from Golem and the CNN report, a Greek collapse will likely mean a hit for German & French banks which will devalue their asset base and therefore affect their ability to loan and borrow money.  Whilst we're hearing all about bonds different countries hold in the Greek economy, we have no picture of how much our stability hinges on the stability of the European banks and what will happen if when their money supply locks up.

Methinks the engine is about to blow a gasket.

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