The Daily Mail merrily repeats a story which is patently untrue:
Britain could be hit with losses of up to £366 billion from the collapse of the Greek economy, it has emerged. Ministers had claimed that British banks have 'only' £2.5 billion of exposure to Greek government debt, while the Bank of England says the potential losses would be just £8 billion.
But experts last night said that UK financial institutions are in far more danger than previously thought, because banks are tied up in complicated derivatives and insurance deals. They warned that if Greece defaults on its debts the crisis could cause a series of dominoes to fall, with Portugal, Spain and Ireland heading to the wall in turn...
Ho hum.
The nominal value of all these side bets may well be £336 or £366 billion (the headline and the contents of the article are not consistent), they may well be £3,360 billion or £3,360 quadzillion, but it's still nothing to worry about. As I've said before, beyond a certain level, it's not proper money any more, it's just numbers on bits of paper:
1. These banks and financial institutions have all made bets with each other, it is a zero sum game, so even if some banks end up losing a total of £336 billion, other banks will win £336 billion - and I'd assume that most banks have inadvertently made each-way bets because different departments can and do take opposite positions.
2. The total amount that any bank can lose is capped at its total net assets; I guesstimated the total net assets of UK banks (i.e. shares + bonds) at £873 billion last time I looked, so absolute worst case, UK banks have only bet with non-UK banks and they lose every single bet, shareholders and bondholders would lose just under half their capital.
3. Commonsense tells us that if you have assets worth £10,000 and foolishly enter into a £1 million bet which you lose, the maximum you can lose (and the maximum amount which the other person can win) is £10,000, which whittles that £336 billion down even further.
4. Let's say that Big Bank and Small Bank have entered into such a bet and Big Bank wins - the most extreme outcome is that Small Bank loses everything and, having nothing left to offer, is taken over by Big Bank lock, stock and barrel. So along comes the Monopolies & Mergers Competition and splits them up again, big deal.
Surprised by the outcome
3 hours ago
12 comments:
I suppose the point is how the losses are distributed:
1) To the producers
2) Or the idle
And... WHY do we do all this anyway. Isn't it more efficient to work for a living than gamble?
RS, producers get the losses (via the tax system) and bankers and investors (gamblers) get the profits.
I'm somewhat confused. I can see that UK and its banks are not particularly exposed to Greek debt, but considering a Greek default will automatically mean an Irish default, and UK banks are £120bn exposed to Irish banks (as well as Gideon's big friendly £11bn loan earlier this year), isn't that just a fig-leaf? It's the nature of defaults and contagion under discussion, rather than the specific identity of Greek creditors.
With regards to the stuff about banks, I understand the "zero-sum" and "asset/liability" thing, but surely the point is that if a bank lost all their money it would have a huge material effect on people's lives. That's the whole point of being too big to fail, surely? I know that if suddenly cash machines stopped giving out cash it wouldn't take society long to go fucking apeshit, to say the least. And the point here being that if Ireland defaulted, with UK banks being so exposed to them, they would fail, and be too big to save.
We can't predict what would happen though because each time the banking system tries to correct itself the central bankers fire up the printing presses.
In the past state insolvency wasn't such a big deal because other parts of the world were healthy and could always take up the slack, this simply isn't true anymore so those in charge will do all they can to prevent a Greek default. They don't like the thought of a bit of financial reality!
There's real money at stake here, perhaps it would take the removal of carte blanche state guarantees and a bit of real market risk to hammer this point home.
BNJ: "a Greek default will automatically mean an Irish default" maybe it would, maybe it wouldn't.
The £120 billion is a made up figure as well. I refer you to The EU Debt write-off "Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP" with a bit of judicious netting off, because while Ireland/Irish banks owe the rest of the world shed-loads, Irish banks in turn have invested shed-loads in UK and European banks/government bonds.
If banks fail to put notes in cash machines then the government just takes over the cash machines and bails out DEPOSITORS under the normal rules (first £85,000 and so on). It's all nothing to worry about unduly :-)
CD, it's only real money as long as the government pretends it's real money and takes real money from taxpayers to give to bankers. If governments call their bluff, we'd soon realise that these trillion dollar bets weren't using real money at all.
"losses of up to £366 billion" = weasel words again. It means that losses could be between £1 and £366 Bn. But its phrased to make you think the latter. Tossers.
Interesting post on Flanders' blog, basically asking whether other countries particularly in Latin America might have had the right idea and that while crashes are painful countries often bounce back far stronger after them.
L, like I say, it's all made up figures. this article says that it will be US banks who will take all this on the chin (so it's not our problem).
BE, exactly. However naughty it is to do this, history shows that it works.
I think BE means 'defaults' rather than crashes. But they do go together. Why? Nationalised money that's why.
Sorry to go "off topic" but this story here is interesting - especially in the context of how raising VAT to 20% will see an additional £12 billion flood into HMRC/ We can't lower VAT because it would cost £12 billion, and like er nonsense, and especially so because VAT is a term you'll search for in this article and the 2 other linked articles by Ms Wood this month which don't even mention VAT !
http://www.guardian.co.uk/business/2011/jun/22/comet-put-up-for-sale-by-kesa-electricals-group
Anon, VAT is never off topic, and hiking the rate to 20% will improve govt finances by nowhere near £12 billion.
Firstly, it's a circular calculation, so receipts would go up from 7/47 to 1/6 of total VAT-able spending, which gets the static increase down to £9 bn.
Then you have to factor in that corporation tax/PAYE receipts will fall by 30% - 40% of that £9 bn, then factor in the loss in PAYE receipts from 250,000 people made redundant and the extra welfare costs, and they'll be lucky if government receipts improve by more than £4 bn.
That's the Laffer Rainbow for you - we lose £12 bn, the government gets £4 bn. Twats.
As I've said before, beyond a certain level, it's not proper money any more, it's just numbers on bits of paper:
Precisely. So we wipe off that fictional debt to the IMF and others, reduce taxation and encourage manufacturing again.
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