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Southern Copper Corp. Message Board

  • rogluther rogluther Feb 22, 2012 12:05 PM Flag

    OT Loss On Greek Bail-Out OT

    How much are the banks going to lose on the Greek bail-out?

    Let me see if I can run a much simplified set of numbers and try to come up with an directional answer.

    Let's' say the “banks” had $17 billion on their books from deposits received from a variety of sources. With this they loaned Greece $170 billion (fractional banking at a 10% reserve requirement). So, in other words they created $153 billion with a stroke of the keyboard.

    Let's also say they loaned Greece this $170 billion only 4 years at a low interest rate of 5%. That would mean that they collected $8.5 billion over the last 4 years for a total of $34 billion.

    With the latest bail-out, its said the lenders took a 50% haircut on the value of their bonds. Their loan now has a book value of $85 billion but is still paying interest at a ? % rate (higher than 5%). If I take the current value of their bonds plus interest already earned, then their initial investment is worth/generated $119 billion.

    I'm assuming for the sake of simplification, that the banks did not “lay-off” any of their bets in the derivatives market (unlikely).

    The bottom line is they now have $119 billion for a $17 billion investment while still collecting interest on the $85 billion. To complicate matters just a little bit more, I believe their current $85 billion investment is now considered a “reserve”. So, it is feasible that the banks could write loans against this reserve plus the interest already received ….. in other words they may be able to write loans for over a trillion dollars

    The banks will have to write down their initial investment and that will restrict their lending ability until they re-build their reserves. Call it a lost opportunity cost.

    But …... IMHO they lost nothing on their initial investment.

    The miracle of fractional reserve banking.

    The bottom line is that the “banks” are just fine. If you, however, bought Greek bonds you're screwed!

    Where have I gone wrong?

    Am I making you think?

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    • rog, it sounds like you've missed a vital point.

      the potential write-downs are the nub of the thing. through the "miracle of fractional reserve banking"* the losses potentially could make banks formally insolvent, and surely will materially change the short term creditworthiness as calculated by any consistent method.

      Lehman didn't blow up because it lost the ability to earn money, it blew up because due to its balance sheet, nobody was willing to lend it the money it had become accustomed to using for greasing the wheels.

      when you structure your cash flow situation so aggressively that you require regular interactions with Other People's Money to get through your day, keeping up with appearances becomes very very important. we're hearing this about governments ad nauseam, but the private, for-profit institutions that are commonly contrasted with governments are actually *more* subject to criticism on this basis.

      banks are safe because currently for all intents and purposes, they OWN the treasuries of the countries they ostensibly belong to. if the political food chain should somehow become reorganized, i doubt very very much whether the banking industry of the world would long survive in its present form.

      * you're showing your age here. "reserve banking" is such a quaint, conservative procedure. the fed has said modern finance is much too well-developed to require those reserves anymore- we have statistical models, who needs to reserve against losses??? reserve banking is dead, long live "fiat banking"!

      • 1 Reply to misanthropope
      • Mis ..... you are of course correct.

        Your last paragraph however confuses me, I assume it's "tongue in cheek".

        As I'm sure you know, there IS a reserve requirement ..... presently 10% for larger US banks. This requirement is IMHO somewhat of a sham not always strictly met. There ARE reasons that FED and others run bank "stress tests" (reserves being one).

        Another thing that bothers me is that while banks are indeed still making loans, to whom are they lending? It's been written that a larger portion of their loans are now going to speculators .... and that's prescription for disaster. If Romney wins AND he appoints Ron Paul secretary of the Treasury maybe we'll find out (that would be a real hoot).

    • If you care to enhance your knowledge on how our financial system is screwing you go to this link and read the article.

      Since I'm a stupid old man this is the first time I've tried to copy and paste a link ..... I hope it works.

      Let me know what you think.

    • Mongo not thinker.
      Mongo just pawn in game of life.

    • “The Greek deal is a sham. It's designed to make everybody feel better,” U.S. Investor Jim Rogers told Reuters Insider tv. “This Greece deal is only designed to get us through the French election and the American election and the German election.”

      • 2 Replies to rogluther
      • A further consideration on the deal.

        I don't think it is sustainable without economic stimulus, which is sort of what got them into trouble. Borrowing for public sector expansions which led to an artificial boom. Hmm .. it sounds a lot like the US and then add borrowing for two wars on top.

        So, Greece gets 1xxMillion euros to meet its obligations for the next year. In return they do some belt tightening which reduces their employment rate. It would work if the spending cut substantially exceedes the corresponding drop in tax revenue. This is really sort of a minute discussion through just a Greek colored lense. But though an economic union lense, it is far from settled.

        "the long term worry for equity investors is whether or not the EU can survive more bailouts. The one thing Wall Street hates most is uncertainty and this crisis is full of it. The debt burden of the so-called PIIGS countries (Portugal, Ireland, Italy, Greece & Spain), is large and won’t just go away with one deal. Even if Greece is saved, there is still a lot more countries, bigger countries, in need of saving before we can call an end to this crisis. This is critical because if the EU or the eurozone collapses, stock markets around the globe would fall sharply amid fear of a global recession."

        I do not think the eurozone will collapse but it has the real ability to spin the world into further recession.

        Now how does this temper my bullish attitude on copper?

        I am thinking about hedging strategies. This naturally bullish boy is paying attention to the bear in the orchard.

      • The real damage was done to PIG bond rates around the world, now that cds has been proven to be a complete sham, debt can not be properly hedged. This means borrowing costs will need to have a much higher premium, but then again, banks are buying all of this debt with free money so maybe it wont matter?

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