The sovereign debt-tritus, waiting to decompose all over your balance sheet
I’m not really one for horror – so I got an almighty fright when I took a look at a chart from the BIS via the New York Times website, which showed the exposure of the financial institutions of various European countries to each other’s sovereign debt. Are you sitting down? Here we go:
So, we know that British, French, German and Portuguese financial institutions are all especially exposed to a credit event on Greek debt. However, who is exposed to those financial institutions? And who is exposed to those who are exposed?
Nobody knows the answer to those questions. And that, I think you’ll find, goes a long way towards explaining why markets panic – and why all kinds of unexpected correlations start going to 1.