I want to return to a topic that I wrote a comment about a long time ago on the Guardian and was one of the few times I was deleted. I think it was felt I was treading a little close to shark-infested waters.
Greece owes €265 Billion (These are total debt numbers which including sovereign and commercial debts together)
Ireland owes €865 Billion
Spain – €1 Trillion
Italy – €1 Trillion
Portugal – € 280 Billion
These are rounded figures but from various sources one of which is the BIS. The total sums involved are less important than the next lot of figures which show the reciprocal, incestuous nature of the debts.
Portugal owes Spain €86 Billion.
Spain owes Portugal €28 Billion
Italy owes Spain €47 Billion
Spain owes Italy €31 Billion
The web encompasses almost all the rest of Europe but this suffices.
Now there are some legitimate reasons why governments buy each other’s debt, so let’s deal with those. They need to keep their money somewhere and not all in the sock draw. So they hold some cash, lend to their banks and buy debt (IE lend to another government). Government debt is considered the safest debt to own and each government further spreads what little risk there is, by buying debt form different countries. Debt buying is also how countries return cash to a country with whom they trade and whose currency they have accumulated and need to return. Fine.
The problem is that Spain doesn’t do that much trade with Portugal. Spain does not need €86 billion of Portugal’s debt. Nor is this in any way part of a sensible strategy for keeping Spain’s money stashed in safe places. Because Portugal is broke. How can I say that? Well Portugal owes €280 Billion it doesn’t have – that’s how.
Spain doesn’t have the Trillion it owes, neither does Italy nor Ireland. Yet all of these countries have bought the debt of the other insolvent countries. What we have, in fact, is a group of vastly indebted, bankrupt countries busy buying each other’s debt and owing each another other money that none of them has. Or has any chance of getting any time soon.
(OK that’s checked the equipment. Time to dive in with the Sharks.)
Why are they doing this? What are they getting out of it?
What I believe they are getting out of it is they are laundering each others debt. This is how I believe it works. It is closely related to check kiting.
I can’t sell my debt. you can’t sell yours. At least not enough and not at a decent rate. But if we agree to buy each others debt then we can both tell the world – we have buyers who want out debt – good for the credit rating. Plus we both now have an ‘asset’. You have my promissory note, I have yours. We are both banks so our credit is good – especially because neither of us seems to be having any trouble selling our debt – so we can legitimately count each others debt as good quality. In fact, because we are financial institutions who know about money – we can mark this ‘asset’ to model. Which means we can mark its value as anything the hell we want. – So we do – full AAA face value. Brilliant we were both broke, now we both have a valuable asset. Good for the balance sheet.
Now for many purposes this might be enough. For the first part of the financial crisis it was enough. Banks ‘rebuilt’ their balance sheets, looked healthier, and on the basis of that recovered health did business with the unwary and uninformed. But what happens if we need actual cash. Maybe we have some bad loans that need to be paid down.
OK if we want cash, we have a couple of options. First we can try to sell the asset to the unwary. That would be fraud if you or I did it. If banks do it its called er… being smart, I think. That worked for a while in this crisis. But eventually even the stupid people get wise. So now we have to find another patsy.
Let me introduce you to your nation’s Central Bank. We now take our ‘assets’ to the bank’s bank – our Central Bank. We deposit it and withdraw cash in its place. It’s that simple – as long, that is, as the Central Bank says yes. Which begs the question – why the hell would they say yes?
Surely they would know we are defrauding it? Well, if they are doing their job at all then they certainly do know what we are doing. After all most of board of the central banks were bankers like us at one point or another. We advise them!
Well, the first reason they might agree to do it, is they might consider it a lesser necessary evil than having to admit to the fact that we are broke, they let us get into this state, and they now have to deal with the consequences – both financial and political. Second we might all be personal friends. Same schools, family ties, professional loyalties. Maybe. Just possible. No names mentioned.
Or it could be that the central banks are doing it themselves and are therefore not in a position to get technical with us.
In their minds I am sure they see it is ‘spreading risk’ or standing shoulder to shoulder to stave off a crisis. The exact same crisis that every bankrupt crook feels when his hand goes into an empty pocket and his creditors refuse him credit and then start calling at his house for payment. That’s a crisis. An honest man pays the debts he can, admits he is bankrupt and starts again. A crook lies and steals.
In the end laundering or kiting is illegal, for a simple reason. Someone, in the end, gets stuck with the debt. The crook spends the cash, to stave off his crisis – maybe he even really intends on paying you back as soon as he can – but the empty check/asset/debt is still siting in some one’s account. Until that it, the day they try to cash it and find they have BEEN ROBBED.
Who do you think has been left with the dud check? YOU AND ME. The PUBLIC. Who arranged this THEFT? Our central bankers and our politicians.
A brief addenda for the interested.
First objection to the idea of debt laundering is that debt is usually thought of as the absence of money, so, how can you launder it? After all you lent your money out and no longer have it in your account. All you have is the debt agreement you ‘bought’. Good question. This is why banks pay accountants.
Accountants can show you that the debt you bought is in fact a promise of income. The person who borrowed from you (you bought his debt) has agreed to pay you. So there will be payments. Those payments are income. Voila – your debt is not an absence of money, it is a promise of income. Step one.
Step two – please note that any paper money says on it, “I promise to pay the bearer”. This is the promise of future income based on the tendering of this promissory note. Your debt is a promissory note – it says ‘I promise to pay’ on it. The person/nation to whom you lent, whose debt you bought, has promise to pay you both the interest and the capital sum. That is income. And since all money is the promise of income, your debt is also money. You can take that ‘I promise to pay the bearer’ piece of paper and spend it like all other promissory notes.
All you have to do is have a rating agency rate how good the promise on your note is. If they say its AAA good then its cash in your pocket. If they say it’s sadly not such a great promise worry not! Go to a friendly insurer such as AIG and ask them to insure your promissory note against the chance that the promise it bears might get broken. If you think there is the chance AIG might say no, then still don’t fret, – just put the paper into a sealed envelope, write ‘dark pool’ on the outside and ask them to insure it without looking. Believe me they’ll say yes. See above post (The Battle for Power ) for details and proof.