How Protecting Against Derivative Losses Drive Central Banks

Executive Summary

• Protecting against derivative losses is now a major motivator for central banks, which brings up the question of how much derivatives mitigate risk.

Introduction

This topic is covered in the following quotation.

“Governments cannot be allowed to default for the same reason AIG could not be allowed to default. The financial institutions ostensibly insuring their bonds with derivatives do not have the funds to cover the bets. This was dramatically illustrated in the case of Greece in 2010, when the hedge funds colluded to short foreign Greek debt at its height, the interest rate on the debt reached 30%. Coerced by the European Central Bank the Greek government wound up forcing brutal austerity measures on the Greek people to try to pay the bill despite a decisive vote in a national referendum against repayment. Yet Greece represents less than 2% of EU GDP. Why was it not allowed to default or renegotiate its debt? According to Graham Summers, chief marketing strategist for Phoenix Capital Research, every move the central bank, has made post-2009 has been aimed at avoiding debt structures or defaults on the bond markets. This is what the ECB and other central banks fear. The threat posed By $500 trillion in derivative bets on $100 trillion in government bonds. If the banks are allowed to collapse the entire intermesh financial system could go down with them. The giant derivative banks thus have a gun to the heads of the government and the taxpayers. Public assets must be privatized public services cut workers laid off and taxes raised all to prevent the collapse of a derivative House of Cards, ostensibly created to protect investors against risk, the risk is obviously still there It has just been offloaded by wealthy private players on the go.” – Banking on the People