Why Greece Matters and What It Means To You

Mon, Feb 20, 2012 - 12:33pm

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

turd [at] tfmetalsreport [dot] com ()


Feb 20, 2012 - 12:33pm



Feb 20, 2012 - 12:41pm

And the beat goes on...

Thanks Turd, for helping me stay abreast of this shell game. Global duck duck goose?

Feb 20, 2012 - 12:42pm


call me old-fashioned, but I think it's weird to comment before having read the article.. or at least skimmed through it.

how could I possibly ever be first? :-p

edit: I like articles that conclude with: "keep stacking!"

Feb 20, 2012 - 12:44pm

time to liquidate that IRA

time to liquidate that IRA and turn it into staxable...

Colonel Angus
Feb 20, 2012 - 12:53pm

Time to ditch the job...

...so I can take out the 401k to put it into gold and silver. Then the problem is...what is the next job? I'm working on that right now...

The Doc
Feb 20, 2012 - 1:01pm
The Doc
Feb 20, 2012 - 1:03pm

Eric Sprott Says Silver Will Become a Currency Again

Turd, I was lucky enough to speak to Eric Sprott a couple days ago, and he told me silver will become a currency again.
We have seen this already in gold...and have heard from Hugo Salinas Price about his efforts to remonetize silver in Mexico, but Sprott seems to believe the market will take care of this for us in respect to silver. 
After speaking with him for nearly an hour, I can say definitively that ES is one of the true Good Guys, for those interested. He essentially told me that he enterred the silver market as a manic investment in order to stand behind the little guys against the banksters. 


I also agree with Sinclair that Greece cannot be labeled a default. I think this is the whole purpose of Blythe's new European position as well. This next month should be quite interesting to say the least. Keep stacking!

Feb 20, 2012 - 1:03pm

Look Great!

Anything good for PM is great. Ha Ha!!

Feb 20, 2012 - 1:06pm

great post TF

Conclusion... just keep stackin.

I came to that same end. But in a more simplistic fashion. One constant in today's world is that the leaders worldwide will keep making the wrong decisions (with the exception of Iceland). Because the right thing is too difficult in one way or another. Our leaders are consistently enept. And the wrong policies are bullish for precious metals. So my CDS insurance is the one with no counterparty risk. And it has performed well, even though it is being kept from signaling a default. You would think more of the smart money would get on board sooner. But that's precisely how I know it's not a bubble. Rather its still a buy and hold.

Be right and sit tight.

Feb 20, 2012 - 1:11pm

Pressure and Time

Sure ain't greek to me, seems like all we have here is more of the same geology, pressure and time. KEEP STACKIN!

Feb 20, 2012 - 1:14pm

Can't help but feel....

Firstly, another great post by our Turd. Well done old bean. Despite the well laid out logic though, I can't help but feel that some global institution (IMF?) is going to come in and loan/pay for the paultry Greek debt. I mean, in the global scale of trillions, it's peanuts at a few billion - probably goes right back to banks anyway. Don't be surprised if the fed does it through some back door trick so Joe Citizen picks up the tab. It will buy a little more time, but not that much as the consequences mount. So, I don't believe March 20, or before, is going to be as bad as predicted here. Its too obvious, and too soon. I could well be wrong, but it's a hunch based on the slimy weasel banker tactics I've seen so far in this "crisis"...

Feb 20, 2012 - 1:15pm

March 20th

March 20th marks the Vernal Spring Equinox in the northern hemisphere, happy days maybe indeed be here again.

Feb 20, 2012 - 1:19pm

Long term vs Short Term

My question is this. Wouldn't a default drive banks to liquidate positions in gold and other assets in order to try and cover massive losses causing a short term dollar rise and push PM's lower? In other words wouldn't a Greek default look a lot like 2008? Or did that already happen this past summer? So I guess the question is this: did the market already price in a total Greek default? Are their any safe haven assets left to sell? Just thinking out loud!

Dr Durden
Feb 20, 2012 - 1:21pm


Sweet. Looking forward to that.

Also, thanks for laying this out kindergarten style, Turd. I've always maintained a margin call scenario playing out as the cookie continues to crumble. Got my fingers crossed for another bear raid this week cause silver is like crack to me now, I start to get all fuzzy if I can't buy some on a regular basis.

Feb 20, 2012 - 1:26pm

Why in the world did the morons who run this

country ever approve of those CDS.s??? Yeah the banks make bad bets and lose on those CDS.s and the sheeple have to pay for it.. nothing wrong here! 

It will not change unless the people change.. they will not, so time for a really big change..

Feb 20, 2012 - 1:26pm

Why in the world did the morons who run this

country ever approve of those CDS.s??? Yeah the banks make bad bets and lose on those CDS.s and the sheeple have to pay for it.. nothing wrong here! 

It will not change unless the people change.. they will not, so time for a really big change..

Feb 20, 2012 - 1:28pm

Well thought out Mr. T

 Complex is an understatement...

Thank you for keeping so many better informed. 

Would love to discuss these topics with friends or family, but... unless you come in under the Radar of the Normalcy Bias... there is no faster way to have someone walk away!

Brotha Bob
Feb 20, 2012 - 1:32pm

Greek default, or another

Greek default, or another Gulf war? At this point who cares! It is all bad news. And it is getting worse. I will be amazed if they find a solution for Greece. And, it they do what about Ireland, Italy, Spain and Portugal? They will all want some kind of deal as well. You can kick they can as far as you like. Sooner or later it will hit a wall. So, if not Greece, what about Iran? Seeing oil going higher will not help anyone. UCO was a good call Turd! And, does anyone think the economic screws the west is putting on Iran is going to help? Same BS we did to Japan before PH. It is time for a reset.

Feb 20, 2012 - 1:38pm

The market has priced in a

The market has priced in a Greek default, but remember as Santa has said it will not be called a default. An "event" will take place, the metals will go up and stay up, but miners along with equities will take a hit. For how long, and how much...that's the question that can't at this point be answered.

Because of the gravity of the economic situation, much worse than 2008, events will be diluted for MOPE sake to try and minimize psychological damage. Like the distortions of Fukushima. The greater the effects the greater the distortions.

But we can certainly count on an event taking place that will favor bullion, not equities immediately. Don't forget this is an election year, equities won't stay down long.

Feb 20, 2012 - 1:40pm


Wow, great schtuff. Thank you!

@Dr. Durden - is there rehab for that? Possibly a reality show endeavor in the making? wink

Feb 20, 2012 - 1:40pm


However, the EE and others who push all the buttons, will design everything for their gain. When we see the gold graph going up at 45% and the dollar also headed north at the same time, then we will know that the end of the old economics is near. jmo

Feb 20, 2012 - 1:42pm

14 billion Euro ?

14 billion measly euros? Is that all? It might be hard for greece to come up with that if they had to pay with sound money or something like the debtors leading up to WW2, but we're talking fiat money here.

Do you really think that the people who have the power to print money will risk their power by allowing cds instability over 14 billion euros?

They can easily kick this can down the road another year by just typing in some numbers. Yes they will try to use fear to get as much money extracted from the real producers in Greece, but in the end their power is quite easy to defend.

My prediction is that they will squeeze greece until they can see no more blood dripping out, then the bankers will simply type in up to a 14 billion euro transfer to the greek treasury in exchange for some 1% interest priority bonds of some kind. The bankers will borrow money from the ECB which will be at a lower (or even negative) interest rate- guaranteeing them a profit, offered a cheap put on this collateral by the ECB -guaranteeing that they will be made whole, Greece will pay off their old bonds with the loan from the bankers, and the can will be thoroughly kicked.

Profits will run to the banks, and losses will be socialized by way of the ECB. 

I am having a hard time getting worked up about 14 billion when it is in the interest of people who print money to make sure the system continues.

Edit to add the most important part: QE to infinity! and Keep stackin!

Feb 20, 2012 - 1:44pm

de canibus loquitur....

imagine you got a new puppy

every time he craps in the yard, you spank him.

every time he craps in the house, you give him a treat.

how long before your house begins to smell bad?

would this happen faster with a smart dog than with a dumb one?

now, lets talk about the united states and how it treats its citizens.

when a citizen is productive, and generates an income he is taxed (spanked).

when a citizen is unproductive, and can't pay his own bills, he is given money (a treat).

are people smarter than dogs?

is it any wonder our economy smells like dog crap?

Feb 20, 2012 - 1:48pm

Great post!

Congratulations Turd! Great post. Thanks.

exiledbear Colonel Angus
Feb 20, 2012 - 1:48pm


Then the problem is...what is the next job? I'm working on that right now

Your next job soon will be figuring out what you will be eating today and where you will be sleeping. It will be a full time job, however there will be no benefits. No retirement plan, no health plan, no plan at all, except your plans on how to keep your body and soul together.

Whoever holds your 401(k) will probably give you shit if you try to cash it out. The way to get around those assholes is to tell them you want to roll it over into an IRA. Most brokerages allow IRA accounts. Then you simply logon to the broker website and tell them to close the IRA out. Simple, don't have to talk to anyone and you get a check in a few days.

Better do it soon, I'm not sure how long the system has got. We're real close to something. When the banking kill switch is used on a country, something's up and it's not going to be very pleasant when it hits.

Feb 20, 2012 - 1:52pm

This is correct

I've mentioned this before but failed to do so in this post.

The ECB cannot simply print money like The Fed can. So, a direct rescue loan of $14B would likely come from The Fed via the IMF.

Again, this sounds like a simple solution but it's all about the "moral hazard". There will only be more loans due in the future, not only from Greece but nearly everywhere in Europe. How will those be handled? Maybe Spain, Portugal and Italy will rush to arrange similar IMF "loans" before the spigot is turned off? This would only serve to accelerate the process and, as stated in the post, the goal is instead to drag out the process as long as possible in the hope against hope that time will allow for enough economic growth to grow everyone out of this.

Dr G
Feb 20, 2012 - 1:52pm

Not to poo-poo the awesome

Not to poo-poo the awesome meat found in the Greece post, but I'm diggin' the idea of webinars with the Turd. 

I think that could take my man-crush to a whole new level.

Feb 20, 2012 - 1:54pm

Iranian Oil Bourse - march 20th also

Big Day - march 20th

Many sources have reported that The Iranian oil bourse will start trading oil in currencies other than dollars starting on March 20th. Last week the Tehran Times mentioned the same date. Expect some insanely volatile markets in late Fed early March

Link to Article

Dr G
Feb 20, 2012 - 1:54pm

Ah, gosh. Thanks.

Frequent webinars would be just another benefit to paying the puny subscription fee.

Dr G
Feb 20, 2012 - 1:57pm

Worth noting, I was watching

Worth noting, I was watching Fox Bidness over the weekend, and Stuart Varney (love him!) was pointing out that although our interest rates are pegged low right now, that doesn't mean they won't explode in the near future.

He used Greece as an example. In the mid-2000s their interest rates were 3.5%. In 2009 something like 6%. In 2010 they jumped to 10%, and then in 2011 up to 200%.

It is coming, and we can't stop it. It behooves all of us to warn our neighbors and anybody that will listen.

EDIT: for those that aren't familiar with Stuart Varney, he is a class guy. He left Europe many years ago in search of a better way of life. He is very outspoken against government spending, and clearly sees that the US is heading down the same road that Europe is on and there isn't anything we can do to stop it. He won't replace The Judge, but he is worth watching and he isn't afraid to fight a logical fight with those he interviews.

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