Got to admit, struggled to read that article... however the gist I think is that banks are not only facing losses on eurozone bonds, but the massive leveraged positions of these bonds, so a default by Greece would trigger gigantic trillion dollar levels of losses throughout the global financial system.The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently.
That's precisely right: the shadow banking system, so aptly named because its death rattle can never be seen out in the open, is slowly dying. As noted yesterday. But lest we be accused of hyperventilating, this time we will leave a respected, non-fringe media to bring out the big adjective guns:
To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up....Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.
U.S. banks direct holding of sovereign debt is hardly negligible. According to the Bank for International Settlements (BIS), U.S. banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. If we factor in off-balance sheet transactions such as re-hypothecations and repos, then the picture becomes frightening.
In any normal situation this would lead to the bankruptsy of the financial system, but in this event, the central banks would move in and flood the banks with trillions of newly printed money to 'recaptialise' the bankrupt banks.
Of course, this will drive the debasing of national currencies even more and lead to the explosive hyperinfation nearer.
