Greensill Capital collapse causing ripples around the world

The collapse of supply chain financier Greensill Capital is having repercussions all over the globe.

In Britain, GFG Alliance, the agglomeration of businesses built by Sanjeev Gupta and his family, is reported to be in talks with Greensill’s administrator, Grant Thornton, over a “standstill agreement” on loan repayments GFG must make to Greensill.

Court documents filed this week indicated GFG has begun to default on its repayments.

GFG Alliance was Greensill’s biggest client and since the invoice buyer went belly-up on Monday fears have been rising that the knock-on effect could see the loss of thousands of jobs within the Gupta empire, including the 11 steel sites owned by GFG that employ some 3,000 workers.

A standstill agreement would give GFG some breathing space and time to find alternative sources of funding.

Meanwhile, commodities investors are worried about the implications of the Greensill collapse on Wyelands Bank, the lender owned by Gupta that was ordered last week by the Prudential Regulation Authority to pay back all of its depositors.

That’s squared things with depositors but borrowers are said to be concerned that they will have to look elsewhere for financing, despite having lending facilities with Wyelands.

Big in Japan

In Japan, SoftBank is set to see most or all of its US$1.5bn investment in Greensill go up in smoke.

Insurance giant Tokio Marine, the company that triggered the Greensill collapse as it refused to renew Greensill’s payment default insurance policies, has instigated an investigation into whether the insurance policies Greensill took out were even valid in the first place, as they might have been sanctioned by an underwriter who insured amounts that were above his allowable limit.

In Germany, local authorities and individual savers apparently ploughed their money into Greensill’s banking arm, taking advantage of too good to be true deposit rates, in an eerie echo of the behaviour seen before the collapse of the Icelandic banks in 2008.

Greensill Bank is said to have around €3bn of savings on deposit, most of which should be protected by insurance.

Swiss role

In Switzerland, there are reports of a blame game taking place at Credit Suisse over its close association with Greensill.

The Swiss bank reportedly lent Greensill US$160mln towards the end of last year even after the German regulator had signalled it was investigating Greensill Bank, which was based in Bremen, Germany.

Credit Suisse is said to be still on the hook for US$160mln.

In summary, the collapse of Greensill is proving to be every bit as messy as many feared and although it does not appear as if it will spark the sort of global financial collapse seen in the second half of the first decade of the current century, it has raised questions about who was supposed to be looking over Greensill’s shoulder.

In theory, Greensill was only dealing with sophisticated investors, financial institutions and finance professionals, so regulators were largely happy to let caveat emptor apply.

In practice, when financial institutions end up taking a bath after an overly aggressive pursuit of profit from financial instruments seemingly specifically designed to bamboozle investors, the taxpayer ends up picking up the tab.

Story by ProactiveInvestors