How much is too much?
Posted by aogTuesday, 28 February 2012 at 08:25 TrackBack Ping URL

Here’s an interesting question

But executives warned that the trouble in Athens was only one part of a malaise that was forcing them to cut back their balance sheets. “We have reduced the balance sheet of RBS by over £700bn of assets”, says Stephen Hester, chief executive of RBS. “That is roughly twice the size of the entire national debt of Greece”.

I won’t begin to pretend that I know what is going on here, so can only express a rank outsider’s perspective, hazarding the comment that, if a bank can write down £700 [b]illion – and the world does not stop spinning – what is the big deal about Greece doing the same with a much smaller sum?

I think that’s an excellent question. I suspect the answer is the domino effect on sovereign bonds.

Comments — Formatting by Textile
Hey Skipper Tuesday, 28 February 2012 at 18:51

Not being particularly expert at any financial task beyond checkbook balancing (and I have gotten a lot better at that now that the computer does it), but RBS probably reduced its balance sheet by either selling assets, or taking a hit on profits.

In contrast, Greece wants to give creditors twenty-some odd cents on the dollar.

Annoying Old Guy Tuesday, 28 February 2012 at 20:14

But if they did half of it as a hit on profits, then even 20¢ on the dollar for the Greek debt would be better.

Hey Skipper Tuesday, 28 February 2012 at 21:29

I don’t think so.

It is the sort of things businesses do all the time. E.G., FedEx bought Kinko’s to function as a front end for the distribution chain. Ten or so years later, FedEx decided to eliminate the Kinko’s brand name, and took a billion or so dollar write down on its profits that year, since that amount of money represented what Kinko’s cost above its worth in terms of buildings and equipment.

Which correspondingly reduced FedEx’s profit for the year. However, no investor got a haircut in the process.

Similarly here. UBS does some restructuring, which included selling some assets, perhaps even at a loss. However, unlike Greece, and like FedEx, UBS is operating in the black, so taking a short term loss in profit does not affect its ability to pay debts in the future.

Greece is fundamentally different. If it was a company, it would have wound up operations and liquidated ten years ago.

However, as a socialist paradise, it has been allowed to engage in full-throated lying all that time.

Makes a difference.

Annoying Old Guy Tuesday, 28 February 2012 at 22:09

Yes, but I was looking at the other side. It’s clear why Greece is bankrupt, but why would writing off its $350B debt crash the rest of the EU banking system, of which USB is only a part?

Hey Skipper Friday, 02 March 2012 at 20:15

I think it is because of the Euro itself. I was living in England during the run up to the Euro, and remembering thinking its absence of a central bank and fiscal policy, combined with very limited real labor mobility meant that the EU had succumbed to magical thinking (without which the left could not exist): only by ignoring a nearly endless parade of the glaringly obvious could one conceive of Europe as any sort of common currency area.

Not that I was any genius—no end of qualified observers came to the same conclusion. Read back issues of The Economist. They laid out the ultimate failure of the Euro with nearly the precision that one could predict the time it takes a ball to fall from a five story building.

The only way to write off Greece’s debt is to persuade German taxpayers that they need to pay for Greeks to retire at 50, after they have gotten fourteen months of pay for 12 months of make-believe work.

There was lots of political strife in England about joining the Euro. “Progressives” were all for it.

As usual, they were dead wrong and are not copping to it.

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