quick question on the impending euro meltdown

OptionARMAGEDDON

what would happen if we defaulted on all gilts bought by the PIIGS as a result of their inability to pay the bonds they have with our UK banks? I believe the figures they have outstanding to uk banks are in the hundreds of billions, meaning further nationalization is probably necessary if it all goes pop.

If we turn round to their banks and tell them that they wont be getting paid by an equivalent amount, could we buy some more flex, as the nationalization would probably be paid with QE and thus limit the damage to the real economy? If credit is being destroyed in fistfuls, the significant deflationary effects would counter any QE surely?

Mr_Mumble

Very difficult to work out the ultimate holders of gilts on the secondary market and you can't selectively default against particular bondholders. If the government wanted to penalise defaulting countries it would be far easier to do this via stricter demands on the release of IMF funds and cutting off EU payments.

Outside of Ireland I doubt the exposure to the other PIIGS would lead to the nationalisation of any major UK bank. Barclays has exposure to Spain and HSBC has a fair amount of Italian government debt but they're far healthier banks than RBS or Lloyds. Also, marking-to-market Spanish and Italian bonds would only currently lose the banks 20 cents in the Euro, very different to Greece where 18 months of EU/IMF funding has subordinated and diluted the value of private sector credit holders to a far greater degree. One caveat being if their investment banking operations have made AIG-type errors then Barclays could be problematic. I'd be most worried about the insurers and Lloyds Banking Group (RBS too but we already own 84% of that!).

The latest bout of QE was a pre-emptive strike against this turnoil - there are some very smart folk at the BoE who knew the Euro was doomed in its current form. Yep, its very easy to read a paper and believe that but to a. know it and b. not fall into the denial of the European politicians (who're still tinkering with the EFSF expecting Italy to pay for Greece when Italy is borrowing at 8% and Greece is being lent money at 3.5%!) is worthy of praise.

purch

Selective default is no different to default.

michaels

I can see your point though, I guess it is a bit like having a mortgage and savings with the same bank, you would like to hope that if the bank went bust it would be your net position that was preserved rather than the mortgage remaining in place and the savings being wiped out...

OptionARMAGEDDON wrote: »

what would happen if we defaulted on all gilts bought by the PIIGS as a result of their inability to pay the bonds they have with our UK banks? I believe the figures they have outstanding to uk banks are in the hundreds of billions, meaning further nationalization is probably necessary if it all goes pop.

If we turn round to their banks and tell them that they wont be getting paid by an equivalent amount, could we buy some more flex, as the nationalization would probably be paid with QE and thus limit the damage to the real economy? If credit is being destroyed in fistfuls, the significant deflationary effects would counter any QE surely?

michaels

So is it really possible that there is another AIG type position out there (apart from the ECB!!) - surely that debacle must have taught banks and insurers to manage their 'tail' risks?

Mr_Mumble wrote: »

Outside of Ireland I doubt the exposure to the other PIIGS would lead to the nationalisation of any major UK bank. Barclays has exposure to Spain and HSBC has a fair amount of Italian government debt but they're far healthier banks than RBS or Lloyds. Also, marking-to-market Spanish and Italian bonds would only currently lose the banks 20 cents in the Euro, very different to Greece where 18 months of EU/IMF funding has subordinated and diluted the value of private sector credit holders to a far greater degree. One caveat being if their investment banking operations have made AIG-type errors then Barclays could be problematic. I'd be most worried about the insurers and Lloyds Banking Group (RBS too but we already own 84% of that!).