Monday, November 19, 2012

Who is buying Euro area debt?



Just some wild, baseless speculation, but with Euro area banks and governments under so much pressure to maintain their capitalization levels, it seems like a fantastic opportunity to launder some money out of the black market.

If I were a politician in certain southerly Euro nations, I would be doing anything to make sure that my country could make its interest payments and keep the flow of money going into the public sector that employs 1/3rd or more of the country, and is a key income in at least half of households - and possibly a majority of voters.



Enter the global black market. Conservative estimates of black market activities peg just the narcotics market at about USD $350bn each year. There are probably not a few banks and political players who are willing to turn a blind eye to the source of certain funds if they can be used to buy bonds. It's hard to guess what the exchange rate is between cash and "clean" or laundered money is, but it's pretty clear that there is at least a half $trillion in black market cash out there from Asia, South America and Russia.

Some countries and banks need capital, and some shady dealers need clean money in the global banking system so they can put it into long term and relatively secure assets, like real estate in America and Britain.  For countries who are feeling a bit betrayed by western banks, when you think of who they have to keep happy right now, it's not the DEA or the US Treasury. The temptation to launder could conceivably be too great to resist.

Let's face it, Euro area governments are more worried about hot flows of capital fleeing their countries than a tide of dirty money coming in. A number of them would welcome it right now.  SWIFT network flows are probably monitored fairly carefully, so it's a matter of getting the money into assets that can be moved onto bank balance sheets, which can then be used to buy bonds to prop up ailing governments.  There must be some opaque, readily convertible security that can be bought for massive amounts of money, with little to no reporting, and then used as collateral in an ostensibly legitimate transaction.

Hard to pick just one, really.

It sounds wacky, but when faced with the kinds of anti-austerity riots Greece and Spain are seeing right now, governments will do what they must to stay in power. A billion here and a billion there buys less and less time these days, but with the threat of a political catastrophe and uncertainty from one week to the next, it would be well worth dealing with some devils if it allows these governments to last just even a week or two longer than their opposition can hold out.

People need jobs and money, and there is a massive amount of that in the black market that just needs legitimacy. Funding a dodgy radical political opposition party with cash "loans" is a great way to launder huge amounts of money through a crisis. There is real risk that extremist parties in Europe could acquire significant financial resources from black market operators who have cash to burn, but need political cover for their activities (drugs, sex, extortion, weapons, fraud etc). If one were a drug or arms dealer with resources in either cash or blacklisted banks, funneling it through a bunch of politically connected thugs in Greece, Spain, Italy or Portugal would both clean it, and provide cover for new ventures.

This is just irresponsible speculation of course, but Europe could get very interesting.

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