Britain\’s banks hold about £2.5bn of Greek bonds.
OK, so now we know that number.
Senior European figures said London needed to focus more urgently on the potential effect of a Greek default on the UK\’s banking sector and economy.
\”The UK has the third largest exposure after France and Germany,\” said a high-level EU source. \”It should be aware of the effect of standing aside from discussions.\”
Nada. Zilch. SFA.
The City paid out £8 billion in bonuses last year, recall? This is less than one third of that. Given that the haircut is likely to be around 50%, the actual amount at risk is one sixth of that.
This isn\’t quite just a burp after a good lunch, possibly more like a slightly worrying fart the night after a good curry, but just not a major concern over the stability of the system.
Another worry is that Britain\’s banks and hedge funds have written multibillion-pound insurance contracts – credit default swaps – that would be triggered if Greece defaults.
Erik Britton, director of City consultancy Fathom, said: \”It\’s not the direct exposure, it\’s the indirect exposure and the implications of an unruly default that I would be worried about. French and German banks bought Greek bonds, and they took out insurance against default. Who did they take out that insurance with? The US and UK banks. There has to be a loser – who\’s the loser?\”
There\’s two problems here.
The first is that all this effort going into making private sector involvement in the haircut voluntary is an attempt to make sure that it is not declared a credit event and is thus not a trigger for those CDS payout.
The second is more important. Everyone who is going to lose money on a CDS has already lost money on that CDS. This simply will not work out like AIG Financial Products.
Recall what the problem there was. AIG had an AAA credit rating. This meant that it did not have to put up collateral when prices moved against it. So they could write a CDS, offering insurance, collect the premium, and then they only had to pay out if there actually was a credit event which triggered that payout.
What they did not have to do was, as they saw prices moving against them, stump up the daily margin of how much those prices had moved against them. So as prices did move against them they had huge potential liablilities building up but no actual cash flow moving out the door to remind them of all this. Then they lost their AAA rating and they had to come up with that 100 billionish in cash to cover those margin payments they hadn\’t previously had to make.
That\’s what bust them. Yes, they may well have been insolvent as well but they were certainly illiquid.
What\’s the situation now? Well, there\’s no one left with an AAA rating writing CDS, so there\’s no one in that situation. Further, the rules of the contracts have been changed, everyone, but everyone, puts up those daily margins as prices move (either way).
So, are there losses on the £30 billion of Greek Govt CDS contracts? Sure there are (but do note that there are thought to be only that £30 billion of them, gross, many of them will nett off against each other). Will a default or a credit event lead to losses being crystalised? Sure. But will it lead to a run on cash, to people unable to cough up because they\’re illiquid?
No, it won\’t, for everyone making a loss has already handed over the cash as that daily margin.
We know who will lose for we can go and count who has already handed over those margin calls. In fact, we know who will lose because we can work out who has already lost. Just look at the cash balances.
What worries me far more than anything else about this story is that someone running a City consultancy doesn\’t know this basic thing about the City he is consulting about.
That\’s shit scary.