Why Greece Matters and What It Means To You

Probably the biggest challenge I face with this website is converting all of my thoughts and research into cohesive and logical sentences and paragraphs. You might think: "Turd, how hard can it be? You've already written about two books worth of crapola over the past year and a half." True, that. However, there are days when the issues are so complex and nuanced but the timing is so critical, it really stresses me out thinking about how to pull this off.

In the near future, I hope to be able to provide webinars where we can interact. That capability is still a few weeks away, though. So, once again, let's just dive right in. I need to accomplish three things with this post:

  1. Give you, the reader, an appreciation of the implications of a Greek default.
  2. Attempt to look ahead at any unexpected consequences of such an event.
  3. Discuss the impact on precious metals prices.


All the hubbub is about this: On March 20, Greece has a debt payment of about $14B euro. They don't have the money to make this payment. They also cannot issue new debt as one-year interest rates are at about 600%!


So, the question becomes, how does Greece stay afloat and who pays for it? The main issue in question and the primary deadline is the bond payment due on March 20. How can that payment be met without triggering a worldwide financial collapse?


"Ah...there goes Turd again, talking about worldwide financial collapse. The King of Hyperbole is back!" Not so fast, my friends. This really is very serious stuff. One of two things is going to happen:

I. The Greek debt receives a negotiated 50-70% "haircut". Institutional (banks) owners of Greek debt will write down the losses, Credit Default Swaps (CDS) will not be triggered and all will be well (at least for a few months).

The problem with this scenario is the interconnectivity of European banks and other financial institutions. One bank's assets (Greek bonds) are loaned and pledged as collateral to another bank. That second bank then re-uses that asset (the same bonds) as collateral for credit from another bank and so on. Therefore, the marking down of Greek debt does not just impact the primary holder of that debt. There is, instead, a domino effect of what will essentially be "margin calls", where those debts with Greek bonds as collateral will need to be "recollateralized" and this is going to require a lot of new liquidity (money).

II. "Haircut" negotiations fail and the March 20 deadline results is an undeniable Greek default.

Let's look at the term "Credit Default Swap". The name for this transaction is appropriate. One institution "swaps" (trades) the "default" (bankruptcy) risk on a "credit" (bond) with another institution. In regular investor terms, the process is much like buying a speculative stock. For example, let's say you want to buy some stock in ABC Mining because you're hoping that their new mine is going to be huge. However, if the mine doesn't pan out, you fear that ABC is going to zero. So, you hedge your bet. You buy 100 shares of ABC Mining at $12/share but you also buy a $10 put option on the stock. If the ABC mine is a dud and the stock goes to zero, you're out your $1200 in stock but at least your put option is worth $1000 so your real loss is just $200. With this "insurance" against loss, you go ahead and buy the stock, supporting the price and potentially providing the much needed capital that ABC needs to develop the mine.

So, now, let's relate this back to Greece and the Greek CDS. On the billions in outstanding Greek debt, there are subsequent billions of CDS "insuring" that debt against bankruptcy. If a default is declared on March 20, the CDS will be "triggered". At this point, someone/something is going to have to put up a lot of money. Santa informed us a couple of weeks ago that he believes that about 97% of the Greek CDS were written by the big 5, TBTF U.S. banks.


Some have said that this risk is way overblown. They say that the "net" CDS exposure of the U.S. banks is nominal. What they mean is that Morgan Stanley, for example, may have $39B in gross CDS exposure but Morgan Stanley also owns $38B in CDS on Greece debt. Therefore, Morgan Stanley's net CDS exposure is just $1B. That's all well and good if you stop there. However, you can't! The next question is, which institution is on the other end of Morgan Stanley's $38B? Let's say, for simplicity's sake, that it's Goldman. Now Goldman has $38B gross exposure to a Greek default. But Goldman will tell you that they have $37B of the $38B laid off so they're net exposure is just $1B, too. See how this works? At some point, someone is left holding the bag.


And for the bag holder, simply defaulting on those credit default swaps is not an option.

  1. If the bonds are worthless and the CDS are too, the institution that held the bonds gets zero in return for their investment in Greek debt. This would destroy a lot of European bank and financial institution balance sheets, leaving those institutions insolvent and possibly bring down the entire European and world financial systems.
  2. Even if "the system" survives, the market for distressed sovereign debt evaporates. Go back to the mining stock investor analogy. Would you make the risky investment without the "insurance" against catastrophic loss? Maybe, but maybe not. Will institutions continue purchase the debt (finance the spending) of nearly-bankrupt nations without CDS "insurance". Maybe, but maybe not.

Therefore, a declaration of default and a CDS "trigger" is highly unlikely as the associated "cost" would be astronomical and continued CDS issuance is necessary to support the illusion of a market for sovereign debt.


To assess the short-term and long-term impact of the Greek situation on PM price, we have to first attempt to predict how all of this will play out. As you've probably determined by now on your own, it is clear that, whatever happens, the CDS cannot be allowed to fail.

We've been through this before. In 2008, AIG was the "bag holder"; AIG was the institution with the gross CDS exposure. Recall that, after the real estate collapse of 2007, there were billions in dollars of worthless CMOs and CDOs on the balance sheets of the TBTF banks. To insure this default risk, the TBTF had purchased billions in CDS on these securities. The primary issuer of the CDS was AIG. When defaults were declared, AIG was on the hook for the billions in losses. Since AIG couldn't pay, the U.S. government nationalized AIG and paid off their CDS for them. The TBTF banks who had a large gross exposure but not a large net exposure were able to survive and "the system", in general, has survived for 3+ additional years.

We are faced with a similar situation today but it is much, much worse due to the size of the problem and the aforementioned interconnectivity of the European banks. If a deal is not reached by March 20 and a default is declared, the resulting financial calamity might be so large that no amount of quantitative easing can fix it. Therefore, we must assume that a deal will be reached.

A negotiated haircut will buy more time and, since "time-purchasing" has been the modus operandi of central banks the world over for 3+ years now, you have to expect that this eventuality will come to pass. A haircut deal is by no means a permanent solution, though the markets and the media will attempt to spin it as such. The proverbial "can" will simply have been "kicked" down the road until the next potential problem in Spain or Portugal or Italy or France or...

On the back of this deal, I'd expect the euro to rally and the dollar to fall. This may even become a trend for a while as attention shifts from from the insolvency of European governments to the insolvency of the U.S. government. A flight from the dollar may ensue and a global "event" may become necessary to stem this tide and reverse funds back into the dollar. War, anyone? Just sayin.

At any rate, both possible outcomes would seem to be precious metal positive.

  1. A haircut deal will cause significant, European QE. Though the euro may initially rally, Euro QE may cause the euro to fall and dollar to rise and this euro devaluation will support even greater demand for gold and silver. Later, a renewed focus on the U.S. debt situation will drive the dollar much lower and, as you know, a falling dollar directly correlates with rising PM prices.
  2. No deal prompts the activation of CDS. As stated above, allowing a CDS default would be disastrous and would cause significant, American QE. This dollar devaluation will support even greater demand for gold and silver.


Keep stackin, baby! If you'd like to make some fiat out of this, maybe consider some long-dated call options. As you know, anything can happen short-term and The Cartels often control the short-term price. However, I hope you now see that, no matter how the Greek situation is resolved, demand for precious metals will only increase and, with increased demand, you will eventually see a significant increase in price.

It's going to be a crazy week and, as we move into March, volatility will undoubtedly be increasing. Be ready. Plan ahead. Devise a strategy. Prepare accordingly. TF

About the Author

tfmetalsreport [at] gmail [dot] com ()

Subscribe or login to read all comments.

Support TFMR

Donate Buy Silver

Access Subscriber Benefits

Listen to TFMR on the go in your favorite podcast app, and join our member-only forum discussions!

Key Economic Events Week of 9/19

9/20 8:30 ET Housing Starts
9/21 10:00 ET Existing Home Sales
9/21 2:00 ET FOMC Fedlines
9/21 2:30 ET Chief Goon Powell
9/22 BoE and BoJ rate decisions
9/22 10:00 ET LEIII
9/23 9:45 ET Flash PMIs for Sept

Recent Comments

by GoldHermit, 10 min 52 sec ago
by Connie, 17 min 39 sec ago
by CC Horses, 32 min 3 sec ago
by Ronnie 666, 33 min 36 sec ago
by Libertybella, 39 min ago