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Jim Cook

 

RUNAWAY SOCIAL SYMPATHY

Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

 

Condensed Articles

August 30, 2012

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WHY SPAIN MATTERS
By Graham Summers

Everyone should care about Spain.  Spain could potentially take down the banking system in Europe, which would leave the U.S. facing a financial crisis at least on par with 2008.  Many European countries have massive debt problems: Portugal, Italy, Ireland, Greece, and Spain, the infamous PIIGS.

When these countries [governments] issue debt, it is mainly the European banks that buy it.  So let’s say Spain issues 5 billion euros in new debt.  Most of that will be snatched up by Spanish banks or some other European financial entity.  This bank will then park this debt on its balance sheet as a “senior asset” or an asset that has the least amount of risk.  The bank will then use this Spanish bond to backstop every type of loan the bank might make.

If Spain defaults, one of the most important “assets” used to backstop its loan and trade portfolio goes up in smoke.  At that point the bank is essentially insolvent and would have to liquidate its loan portfolio while trying to stave off a bank run (as you’ve likely noticed, Spain is facing bank runs galore).  This is Europe’s problem as European banks across the board are sitting on Spanish debt: Spain’s sovereign bond market is 2.1 trillion euros in size.

So if Spain defaults, then a heck of a lot of EU banks (and some U.S. banks for that matter) will see some of their “Senior Assets” go up in smoke, rendering them insolvent.  This in turn could spread like wildfire throughout Europe’s banking system.  This is why the Spanish bank bailout was so rapid (it took only one weekend).  EU officials know that if Spain’s banking system goes down, most of Europe will as well.

How would the debt implosion of Spain’s $2.2 trillion in sovereign bonds affect the financial system?  What about the effect of Europe’s $46 trillion banking system collapsing?  It would be Lehman by a factor of ten, easily.  The U.S. banking system is $12 trillion in size.  And this backstops over $220 trillion in derivative trades.  Of this $220 trillion, 85% are based on interest rates.  So… If Spain, or any of the other PIIGS default, and Europe’s banking system crumbles, interest rates across Europe will spike as the EU sovereign crisis spreads.  At the same time, Treasuries will spike pushing interest rates close to zero in the U.S., if not into negative territory (this happened when Lehman went under).

This in turn would very likely trigger an implosion of all those derivative trades based on interest rates.  This blows up Wall Street and likely results in bank holidays and the stock market even being closed down for a period.  This is why Europe matters.  This is why Spain could wipe out your 401k.  In simple terms Europe is a huge deal for everyone.  We’re not talking about some distant region far off in the distance that we will watch go down from our decks.  We’re talking about systemic risk on a scale that would make 2008 look tiny in comparison.