MF global collapse on EU debt exposure, described by BBC Business Editor, Robert Peston, as “the canary in the coalmine” moment for the global economy:
The good news is that MF Global isn’t big enough or connected enough for its collapse to risk serious damage to the financial system.
It is a medium size broker, with a leading position in futures, which was in the process of being turned into a mini Goldman Sachs by its prominent chairman, Jon Corzine – who, as it happens, was chairman of Goldman for much of the 1990s (before a foray into US politics as the Democrat governor of New Jersey).
With gross assets of about $40bn, MF Global’s lurch into bankruptcy protection under America’s Chapter 11 legislation will keep a few bankruptcy lawyers and accountants gainfully employed for some time.
But there should not be a domino effect of other bankruptcies.
There is bad news, of course, which is that it and Dexia – the Franco Belgian bank that has had to be rescued by taxpayers in Belgium and France – are beginning to look like canaries in a life-imperilling coalmine.
What they have in common is heavy reliance on short-term wholesale finance and big loans to eurozone governments whose debts are seen to be excessive.
MF Global disclosed last week that it has a “net long position of $6.3bn in a short-duration European sovereign portfolio…including Belgium, Italy, Spain, Portugal and Ireland”.
Or to put it another way, it had lent a sum that is equivalent to five times the value of the equity capital it holds as protection against potential losses to governments whose ability to repay all they owe is moot.
Read more: http://www.bbc.co.uk/news/business-15527808