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Vested interests in Greek debt: German banks and US bond insurers

10 July, 2011

Greece needs to default. The debt is unpayable: the longer they continue to service the debt, the more the Greek economy becomes too impoverished to ever repay.

However, expect certain vested interests to fight any debt default every step of the way. Firstly, the banks in Germany and elsewhere that hold Greek government debt. Currently these banks are making speculative profits by valuing the Greek bonds at above their current market value (the current market value is much lower due to the widely perceived possibility of default). The European Central Bank currently accepts Greek debt at the nominal, higher value, as if Greece was a solvent economy.

So the value of Greek debt is completely up in the air–entirely dependent upon how long can the IMF and Greek riot police contain the popular uprising against austerity and unsustainable debt service. As long as they do, the banks in Germany and elsewhere continue to reap speculative profits.

Also taking a share in these speculative profits are financial institutions in the US that have effectively sold insurance to the German banks on the Greek debt. The banks give the insurers a steady cut of the speculative profits in exchange for ‘peace of mind’–in this case a commitment that the bond insurers will pay out in the event of a Greek default (i.e. in case of a victory by the Greek masses against the IMF and the riot police and the tear gas). This is the deal AIG did with the subprime lenders, remember?

As Michael Hudson (source and inspiration for this post) says here, large sections (too big to fail?!) of the American financial system have basically turned into AIG with respect to the Greek debt. This means we can expect the US to protest loudly against any default agreement, and we can expect the US to weigh in on the side of the IMF, riot police and teargas and against the majority of the Greek people…

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