Cities, states, universities could sink from monster derivatives meltdown.
As begin to rise worldwide, losses in derivatives may end up bankrupting a wide range of institutions, including municipalities, state governments, major companies, houses, and universities.
Defaults now beginning to occur in a number of European cities prefigure what may end up being the largest financial bubble ever to burst – a bubble that today amounts to more than $600 trillion.
The Bank of International Settlements in Basel, Switzerland, now estimates derivatives – the complex bets financial institutions and sophisticated institutional investors make with one another on everything from commodities options to credit swaps – topped $604 trillion worldwide at the end of June 2009.
To comprehend the relative magnitude of derivative contracts globally, the CIA Factbook estimates the 2009 , or GDP, of the world was just under $60 trillion.
Derivative contracts, therefore, have now reach a level 10 times world GDP, meaning even a 10 percent default in derivatives would equal world GDP.
The small 800-year-old town of Saint-Etienne in France has just defaulted on a $1.6 million contract owed to Deutsche Bank. The city entered into a complex swap arrangement to reduce the cost of borrowing some $30 million.
To cancel all 10 derivative contracts Saint-Etienne currently holds would cost the town approximately $135 million, more than six times the amount initially borrowed, largely because no bank or would want to purchase contracts that are now on the losing side of the bet.