Why Sovereign Defaults Matter... and Why Spain is a BIG Deal

by Gra­ham Sum­mers, Phoenix Cap­i­tal Research
The fol­low­ing is an excerpt from my lat­est client let­ter explain­ing why Spain is such a big deal and why when it defaults it’s game over for the EU.
I’ve received a num­ber of emails ask­ing me why Spain is such a big deal for the global bank­ing sys­tem. To fully under­stand the impli­ca­tions of Spain, you first need to under­stand how the global finan­cial sys­tem works “behind the scenes.”

We’ll start first with the US finan­cial sys­tem, par­tic­u­larly the Pri­mary Deal­ers which are the real con­trollers of the mon­e­tary sup­ply (via lending).
If you’re unfa­mil­iar with the Pri­mary Deal­ers, these are the 18 banks at the top of the US pri­vate bank­ing sys­tem. They’re in charge of han­dling US Trea­sury Debt auc­tions and as such they have unprece­dented access to US debt both in terms of pric­ing and mon­e­tary control.
The Pri­mary Deal­ers are:
1. Bank of America
?????2. Bar­clays Cap­i­tal Inc.
3. BNP Paribas Secu­ri­ties Corp.
4. Can­tor Fitzger­ald & Co.
5. Cit­i­group Global Mar­kets Inc.
6. Credit Suisse Secu­ri­ties (USA) LLC
7. Daiwa Secu­ri­ties Amer­ica Inc.
8. Deutsche Bank Secu­ri­ties Inc.
9. Gold­man, Sachs & Co.
10. HSBC Secu­ri­ties (USA) Inc.
11. J. P. Mor­gan Secu­ri­ties Inc.
12. Jef­feries & Com­pany Inc.
13. Mizuho Secu­ri­ties USA Inc.
14. Mor­gan Stan­ley & Co. Incorporated
15. Nomura Secu­ri­ties Inter­na­tional Inc.
16. RBC Cap­i­tal Markets
17. RBS Secu­ri­ties Inc.
18. UBS Secu­ri­ties LLC.
These are the firms that buy US Trea­suries dur­ing debt auc­tions. Once the Trea­sury debt is acquired by the Pri­mary Dealer, it’s parked on their bal­ance sheet as an asset. The Pri­mary Dealer can then lever­age up that asset and also frac­tion­ally lend on it, i.e. cre­ate more debt and issue more loans, mort­gages, cor­po­rate bonds, or what have you.
Put another way, Trea­suries, or US sov­er­eign bonds, are not only the pri­mary asset on the large banks’ bal­ance sheets, they are in fact the asset against which these banks lend/ extend addi­tional debt into the mon­e­tary system.  (more)