Greece Is Just the Tip Of The Iceberg For The $100 Trillion Bond Bubble

Greece, as a country, represents 2% of Europe’s GDP.  The country lied in its financial to enter the EU. Since that time, it’s been officially bankrupt since 2010. 

The country has since gone through a series of “bailouts” and experienced a 25% collapse in GDP (roughly equivalent to what Argentina experienced in its 2001 implosion).

And yet, despite all the bailouts and claims that Greece was “fixed,” the country is set to default on some of its debt this Friday.

How on earth does this farce continue? How can Greece be broke FIVE years after it was first allegedly “fixed”?

The answer is very simple. Greece was never fixed. The Greek bailout was about getting money to German and French banks, many of which would go broke if Greece defaulted on its debts.

This story has been completely ignored in the media. But if you read between the lines, you will begin to understand what really happened during the previous Greek bailouts.

Remember:

1)    Before the second Greek bailout, the ECB swapped out all of its Greek sovereign bonds for new bonds that would not take a haircut.

2)    Some 80% of the bailout money went to EU banks that were Greek bondholders, not the Greek economy.

Regarding #1, going into the second Greek bailout, the ECB had been allowing European nations and banks to dump sovereign bonds onto its balance sheet in exchange for cash. This occurred via two schemes called LTRO 1 and LTRO 2 which happened in December 2011 and February 2012 respectively. Collectively, these moves resulted in EU financial entities and nations dumping over €1 trillion in sovereign bonds onto the ECB’s balance sheet.

Quite a bit of this was Greek debt as everyone in Europe knew that Greece was totally bankrupt.

So, when the ECB swapped out its Greek bonds for new bonds that would not take a haircut during the second Greek bailout, the ECB was making sure that the Greek bonds on its balance sheet remained untouchable and as a result could still stand as high grade collateral for the banks that had lent them to the ECB.

So the ECB effectively allowed those banks that had dumped Greek sovereign bonds onto its balance sheet to avoid taking a loss… and not have to put up new collateral on their trade portfolios.

Which brings us to the other issue surrounding the second Greek bailout: the fact that 80% of the money went to EU banks that were Greek bondholders instead of the Greek economy.

Here again, the issue was about giving money to the banks that were using Greek bonds as collateral, to insure that they had enough capital on hand.

Piecing this together, it’s clear that the Greek situation actually had nothing to do with helping Greece. Forget about Greece’s debt issues, or protests, or even the political decisions… the real story was that the bailouts were all about insuring that the EU banks that were using Greek bonds as collateral were kept whole by any means possible.

Thus, the Greek situation is really all about one thing: the BOND BUBBLE… specifically the fact that sovereign bonds are posted as collateral for derivative trades by the big banks.

The ECB doesn’t care about Greece. If it did, this problem would have been resolved five years ago by simply kicking Greece out of the EU until it regained its financial footing.

And in fact, the whole issue is not even about Greece… the reality is that SPAIN, ITALY, and ultimately even FRANCE are in or approaching similar financial straits as Greece.

At that point you’re talking about well over $3 TRILLION in sovereign debt, which is likely posted as collateral on well over $100 trillion in derivatives trades

The ECB and every other Central Banker/ political leader in the EU knows that what happens with Greece will serve as the template for the much larger, unmanageable problems for Spain, Italy, and ultimately France down the road.

This is why the Greek debt crisis continues without end. The minute Greek bondholders have to take a REAL haircut, the wheels come off the EU.

That day is approaching. And it will change the investment landscape for the entire globe as the $100 trillion bond bubble finally blows up… triggering a chain-reaction in the $551 trillion derivatives market.

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