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Amorphous Commodities Bust Is Taking on a Shape

Sept. 28, 2015 (EIRNS)—One of two companies whose possible bankruptcy is being speculated upon today, is Volkswagen—an eventual and very unlikely result which, if it occurred, would have serious effects on Germany's industrial economy. The other is Glencore, the Zürich-based largest commodity trading company in the world. This threat is immediately more real, and involves a large commodity- and credit-derivatives exposure, the potential "AIG" of a triggered trans-Atlantic financial crash.

The 22 commodities in Bloomberg's Commodity Index have fallen almost without a break from an Index value of 120 at the end of 2014, to 85 now. Wall Street's research divisions are all forecasting the decline will continue.

Glencore (originally criminal speculator Mark Rich's vehicle for the looting of 1990s Russia and the CIS), is both the biggest and the most debt-leveraged commodity corporation. On its balance sheet it is a net $30 billion in debt and also has $19 billion in liabilities, or value-at-risk, in about $2 trillion nominal value of derivatives; and there is obviously more derivatives exposure over-the-counter and off-balance-sheet. The company has been negotiating the sale of assets to try to prevent a downgrade to junk and stave off insolvency. If it is downgraded below investment grade, the derivatives losses will move to all of its counterparties, as was the case which triggered the $180 billion bailout of AIG.

Glencore stock dropped 30% early on Monday alone, triggering drops of 2% in both the leading European, and U.S. stock indices. The cost of a credit default swap derivative to "insure" a Glencore bond of $10,000, rose by 35% in one day to $1,400 up front plus premiums on the derivative. This is typically characteristic of firms considered to be in deep distress in handling their debt.