U.S. Taxpayer's Share of Greek Debt

 Complete default benefits the Europeans and leaves the U.S. on the hook for the balance.

The Bank for International Settlements Quarterly Review for June, 2011 is the first black and white publication I’ve seen on the actual size of the Greek, Irish and Portuguese (PIG’s) debt problems as well as how much the United States and individual tax payers may be on the hook for if it all goes pear shaped.

There are four interesting points concerning these debt issues. These include, who owns the debt, who insured the debt, who profited along the way and finally, who may be left holding the bag.

Initially, Europe is responsible for approximately 95% of the debt of these countries. Most of this would be born directly by Germany and France. However, these countries have purchased Credit Default Swaps (CDS) from U.S. banks to protect themselves on approximately half of the debt they own. This means that if the countries in question end up defaulting on their loans the U.S. banks that sold the credit default insurance will be on the hook for making France and Germany whole again.

The data in the tables is pretty extensive but the end numbers look like there is roughly $890 billion in loans that are in danger of defaulting. The U.S. exposure to these losses both directly and via credit default insurance that U.S. banks have sold is about $200 billion. More than half of that is in Greece, which will be the first to default. U.S. banks are on the hook for approximately $100 billion in credit default insurance to PIG countries with about $35 billion directly insuring Greek loans. The total outstanding credit default insurance sold by U.S. banks to European countries is more than $1.5 trillion dollars.

A quick recap - Germany and France bought Greek debt then turned to U.S. banks to buy insurance on the debt Greece and other countries sold them. U.S. banks collected the fees and sold the insurance even as they were recovering from their own bad loans and accepting bailout money to heal their balance sheets. The fees they collected went on to pad their bottom line and allowed them to post record 2010 earnings. These earnings allowed banks to payout record bonuses for a second consecutive year.

The pending default of Greece will leave U.S. banks on the hook for at least $35 billion dollars. Ireland will add $54 billion and Portugal another $41 billion. These banks also hold direct debt to the tune of another $63 billion. When the market moves on Greece, it will move on these other countries as well. It is simple stampede mentality. Remember the collapse of ’08?

The AIG bailout was due to their inability to meet $85 billion in obligations. It was deemed, “too big to fail.” Bank of America and Citigroup each received $45 billion in TARP money following the sub prime implosion. JP Morgan, Goldman, Wells Fargo and others required governmental assistance as well. Total U.S. bank exposure to Portugal, Ireland and Greece is more than $193 billion.

There are only two arguments left to decide in the coming debacle. First, will we have a partial or a complete default? Complete default benefits the Europeans and leaves the U.S. on the hook for the balance. Secondly, when France and Germany come to the U.S. seeking their insurance payouts will our banks be able to afford them. I don’t believe these banks, funded with taxpayer money and using our savings accounts as collateral for making the loans have the resources to cover their losses. Therefore, the taxpayer may be left holding the bag…again.