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Ukraine, Greece, and the Euro-Debt-Trade paradigm.

February 13, 2015

The most important aspect is the tendency at hand. What we have right now is essentially a coalescence of refinancing commitment necessary concentrated focal points. Notice Greece and Ukraine are being refinanced through the ECB and IMF and other venues at the same time as three political processes are ongoing.

My opinion estimates and ramifications.
Ukraine has roughly $150b in debt both corporate & sovereign.
Greece has roughly 350b in euro debt sovereign.
Euro-Zone money supply of the is around ~9000-10000 Billion this is both M1 and M2 (currency and deposits).

Political process A is the Ukraine peace process. Its’ necessity stems from the need of both Euro area banks to get refinanced for their pledged collateral from both Ukraine sovereign and corporate debts. It also increases likelihood of trade sanction being retracted if the peace holds in the proposition and promotion of goodwill creation. Ergo, the March 15th posturing by the countries wishing to return to normal trade ties with Russia will use the peace process as an argument to wind down sanctions and get to business as usual.

Political process B is the Greek debt renegotiation. This has to provide for flow relief for the Greek state which cannot bear the brunt of the outflows imposed by the IMF and the budget commitments/constraints while at the same time Euro banks cannot have the principal that does not exist be eliminated since it is pledged/re-pledged. There is also a deposit dimension that is ignored in the lending to Greek banks so that depositors could have funds via Euro mechanisms that could detonate if there is a disruption in how things get resolved. That is why it seems the Greeks wanted to have infinity bonds which lowered their cash flow burdens with the need to refinance being eliminated and the Europeans couldn’t agree to principal essentially haircut via the mark to market of those renegotiated bonds. The whole point is for Greeks this is a flow argument because they live in the present and for Europeans it is a past/future argument since they cannot have the NPV of the lent funds be marked to reality yet they are far more flexible on the flow of interest payments.

Political process C is the EU-US trade deal push that is being pushed via both the political implementation of the refinancing of Euro banks via IMF backing or freezing of that refinancing to cajole implementation. While using the backdrop of Ukraine and Greek determinism through trade flow disruption via Russian sanctions and Eurosystem dis-integration via a Grexit. This would detonate the money=debt backing of the Eurozone through evaporation of about ~500 billion Euro a negative event for the money supply at the same time removing swap lines and limiting trade flow clearance if progress isn’t being made. The contagion from this implosion is ignored since Euro banks (Austrian, French, Italian, and others) whom have exposure through both operations and capital market in Greece+Ukraine have been swapped out into the system but in my view would likely go insolvent on a push back and there simply is no way to create capital out of thin air to refinance Europe the way it has to be to clear the losses that exist and experience asset deflation in the aggregate that has to be achieved to clear the system for it to function.

If one is extremely cynical then you could argue that the whole point of Minsk was to allow the refinancing of Ukrainian debt by the IMF so that the European banks whom used it as collateral to borrow elsewhere to continue playing the financial game would be able to go on for a little while longer.

Page 52(on the paper below) shows exposures as a percent, one has to assume that these are not honest numbers and they changed since then. However, if one were to look up every bank that has over 1% of capital committed to “risky”(insolvent) nations one realizes that a) they raised capital b) in the context of European leverage being 30x or more to 1, a complete wipe out of 1% of capital or more is actually a 1/3rd of all the capital a bank has and likely complete insolvency/wipe out with inability to clear depositors or transactions. Ergo if one assumes that Austrian banks are exposed to 3-5% of their capital in Ukraine a wipe out of that 3% would invariably be all the equity capital those banks have. (Hypothetically but more than likely)

If suddenly 500b of 9140b* Euro goes poof and 9140b in Euro translates into roughly e15000 of GDP then one can consider that the ultimate impact through various multipliers, trade gravity, monetary transactions, etc., would be around ~1.64+ per 1 euro lost, ergo ~820 billion euro less in GDP recognition, however they could also print money and make up this gap and hence we have 1000 (trillion) euro QE which is actually a numerical measure which will simply put numbers into the computer to make up the wipe out seem fine and dandy. Granted none of this money will make it into the real world unless the banks that get to borrow against phantom obligations can get some sort of return somewhere from their machinations. If one throws into this the ~50 billion in Euro trade contraction due to Russia sanctions and the aggregate business impact that has through the Eurozone, the real impact of QE ONE Trillion is actually Nil.

(page 2 of the ECB below has total deposits of ~8789 (I exclude 4[215], 5[324] and 3.4[79] which sum to 618 billion euro) and get 8171+967 (currency in circulation) [I don’t think (4)insurance deposits or (5)government deposits should count along with (3.4)repos].
https://www.imf.org/external/np/tr/2015/tr021215.htm
http://www.reuters.com/article/2015/01/05/us-eurozone-greece-banking-exposure-idUSKBN0KE16H20150105
http://www.dnb.nl/binaries/Working%20Paper%20382_tcm46-293531.PDF
[page 52 … One has to be cognizant that some banks raised capital since 2010 but taking scope of risk in relation to capital is non-the-less gives a purview.]
https://www.ecb.europa.eu/press/pdf/md/md1412.pdf

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