According to a report out last week, there is huge off-balance-sheet debt guaranteed by Greece and the other PIIGS, Portugal, Italy, Ireland and Spain. In addition to similar debt guarantees issued by other governments.

Economic Policy Journal, 7 March 2010

Gordon Long, founder of a private venture-capital fund, said in an investor note that there is more than $600 trillion in notational value in the global derivative market, with $437 trillion of it tied to interest rate swaps.

"Any credit event could trigger a cascading event," Long wrote in the report, according to NyPo. "It does not have to be default; it could be a downgrade in swap contracts that would do the trick for a collateral call. Something is going to cause it to topple, whether it's a situation in Dubai, Greece or New Jersey."

"The next 12 months could be very dramatic for the Eurozone," Robert Chapman, publisher of "The International Forecaster," told NyPo.

" I am seeing many sovereign defaults for the PIIGS as well as in Eastern Europe and the former Soviet satellite countries running into 2011," Chapman added.

NyPo provides an example of how and why these nuclear debt bombs were created:

* In 2005, Greece wanted to develop a Mediterranean beachfront location for tourists but didn't want to float infrastructure bonds to pay for the development because its debt load was over the ceiling threshold set by the EU. So it brought in a Wall Street bank, like Goldman Sachs, which suggested it establish a Special Purpose Vehicle.

* This SPV in essence allowed the public development company to finance the infrastructure project with the Greek government guaranteeing the debt. The project moved forward with no impact on Greece's credit rating -- until the housing economy went south and the developer declared bankruptcy. Greece now has to add the debt to its balance sheet.

So when this scenario is played out a thousand times across the Eurozone, the bond ratings of the sovereign countries are lowered, thereby increasing their borrowing costs and eventually leading to a possible default.

This is how the Greek debt has grown 12 times over the initial numbers it had on the books with the European Union.

Bottom line: This was all inflation dependent financing. If the Federal Reserve and the rest of the world continued to inflate, cheap money would have bailed these projects out. With the Fed halting money printing, there are not enough dollars to support this debt structure. It is teetering structure, a bad sneeze could cause the whole thing to come tumbling down.

Submitted by Sullivan on Mon, 2010-03-08 08:53

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