Keiser Report: Gold-for-Bonds & Debts-for-What?!

 

They’re…uh…banks…uh…are…uh…carrying 4 to 5 times the country’s GDP in unsecured debts. Uh…as on top of the notional value of the sovereign debts as well as…uh…some other contingent debts.

 

They’re really the most indebted country in the world and the UK has taken an adversarial position against Europe as…uh…because Europe wants to rewrite their constitution.

 

Uh…Sarkozy and Merkel, they try to accommodate their reconstruction and re…uh…securitization of all this bad debt. And David Cameron in the UK is saying, “Wait a minute. You can’t do that.” So wh…uh, do you see the…this conflict escalating between the UK and Continental Europe?

 

 

Satyajit Das: You’ve got two questions there so let me answer each in part.

 

One is the very high level of borrowing by financial institutions. And you’re absolutely correct. UK is one, Switzerland, also interestingly enough as the other one.

 

And the argument in defense of that as these are entry pot banking centers so they borrow money in and they lend it out on the other side. So, you can’t really look at the financial system balance sheets.

 

But the problem of course is, banks are highly levered. And it doesn’t really matter where the money is coming from and where it’s going. If the people who actually have taken out the loans didn’t pay you back, it doesn’t really matter whether you’re an entry pot center or an entrepreneurial center or you’re a bankrupt center because that’s what you’re gonna be…because you’re gonna be bankrupt.

 

And that’s what we found with basically the problems of banks like RBS and Lloyds in the United Kingdom. So you’re absolutely correct. It’s a banking sector in that sense which basically acts as…as conjured and creates problems.

 

But the second question that you asked is an even more fascinating one because there is this sort of padded dirt that’s taking place between the banks and the sovereigns.

 

Because the banks have problems. Because under the Basel Rules which is the banking regulations, sovereigns were treated in a very interesting way. Sovereign debt was regarded as being…”Wait for it. Risk free.”

 

 

So if you’re an OECD country which is a country like Greece is, your bonds were risk free. So the banks loaded up on this debt on the balance sheet which is, of course, now toxic, and if they were to mark to market that debt properly, in other words, take the write offs…because we all know these debts are not gonna be paid back in full.

 

So under those circumstances the banks would have solvency issues. So basically they need to get rid of this…this sovereign debt off their balance sheet except, of course, they can’t because they need capital to do it and they don’t have the capital.

 

So the other part of this fascinating equation at the moment is the sovereign’s got issued debt. And in part, they need the debt curiously enough not only to roll over their borrowings but to inject money into the banks to recapitalize them to perversely be able to write off the debt which they should in the first place.

 

So there’s this strange circularity that’s going around here. And at the moment, because countries like Italy and Spain are having trouble issuing debt. They’re leaning very heavily on the banking system saying, “Buy my debt. Buy my debt.”

 

But it just makes the problem worse. And the real issue, I think in this relationship goes back to a fundamental discussion that you and I have touched on previously, which is once you get very large financial institutions in these countries and they dominate the economy in various ways.

 

This sort of relationship between the sovereign and the bank is very deeply embedded.

 

And it’s very, very hard to unwind in any meaningful shape, and it’s now a serious barrier to resolve in the European debt worlds. I’ll explain that quite simply.

 

‘Cause the simplest way to do it, we all know, is these countries have to reduce the quantum of debt, which means Greece has to write off its debt by say 60%. And Italy might not need 60% but 20 or 30% certainly would go a long way of writing down their stock of debt.

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