The U.S. is too big to fail, right?
No one knows who will be hurt if Greece defaults
If Greece defaults, who will be holding the bag?On Wednesday, Fed Chairman Ben Bernanke assured us that the effects of a Greek default on U.S. banks would be very small. But in our interconnected world, we have seen many surprises, and they have not been pleasant. Surely, the European banks who directly own Greek (and PIIGS) debt would be most affected. But who else does, and to what extent, is unclear. Recent publications have pointed, as one example, to the exposure of big U.S. money market funds that hold large amounts of short-term European bank debt.
The biggest way that the risk of default is mitigated is through credit default swaps, in a largely unregulated, over-the-counter (as opposed to exchange traded) marketplace where investors buy and sell protection against default on outstanding debt of corporations and countries. Sovereign debt swaps are the gorillas in the PIIGS room, but no one really knows if they are just 800-pound gorillas (large but manageable) or King Kongs .
Only if, or when, Greece defaults will we know who ultimately has sold insurance against that default. In 2008, it was a surprise to find out that AIG had sold a massive amount of insurance against the downgrade of sub-prime mortgages, and the federal government had to come to the rescue, to the tune of close to $200 billion.
The global macro-investment outlook has proven to be very tricky in 2011, with even the largest and most successful hedge funds suffering large losses so far this year. If Greece defaults and we learn of massive exposure by major American financial institutions, more shocks will be in store.
In the meantime, U.S. Treasuries have once again proven to be a deep and liquid safe haven. But I worry about what would happen if investors shun low yielding treasuries because of highly suspect credit worthiness.
Since the 2008 crisis, we have seen an implosion of sub-prime and other private debt replaced by an explosion of U.S. government public debt -- currently $14+ trillion -- and this is coupled with the very real risk that we could default on our debt payments in August if our politicians continue to play a high stakes game of fiscal chicken and are unable to increase the debt limit.
We are not Greece, many argue, but our country is clearly on an unsustainable path of deficits and increasing national debt and we must take steps to curb government spending and reduce debt levels.
The U.S. is too big to fail, right? But who would (could) bail the U.S. out？
扫码加好友，拉您进群
全部版块
我的主页
收藏
