Consequences of a Greek Default

There is much international media coverage today of various scenarios by which Greece more extensively defaults on its debt and possibly exits the euro.  The FT provides a nice graphical summary here.

58 replies on “Consequences of a Greek Default”

The fragile sentiment in the markets was illustrated by Barclays chief executive Bob Diamond, who told the BBC it was conceivable that a major European bank could go bust if the crisis got worse: “The question is, can it be managed … without creating systemic risk, which was the big issue around the Lehman Brothers collapse.”

Nils Pratley

A taboo has also been broken. Merkel and Sarkozy, in issuing their ultimatum to Greece on Wednesday night, acknowledged that is possible for a country to leave the eurozone.

Larry Elliott for Ciaran O Hagan

Third, there has to be a recognition that the fetish for austerity in some countries is proving self-defeating. Those who warned that the global economy was not fit to withstand savage budget cuts so soon after coming off the life support machine have been proved right.

The Steve Bell cartoon
http://www.guardian.co.uk/commentisfree/cartoon/2011/nov/04/steve-bell-angela-merkel-eurozone-crisis

is based on a Brueghel

http://3.bp.blogspot.com/_2Z7VYcC8u4c/SAUYQ8E83qI/AAAAAAAACFE/PZ45jplMxuw/s1600-h/brueghel_death-detail.jpg

Noises coming out of the likes of Barroso this morning (‘it’s up to Greece if they want to stay in the Euro’) is just a bit of knife twisting after the big threats had already been made the other night. EU leaders may be saying they can go if they want to but behind the facade they dread that happening. They know damn well there would be an unmanageable set of consequences if Greece suddenly pulled out of the Euro now. Also, most Greek MP’s know which side their bread is buttered.

I suspect the chances of Greece leaving in the short term are low. I’m going to be surprised if George survives the vote tonight but I could be wrong and he will still be there but in a unity government soon enough.

What’s important now is the timescale for the elections. From my reading, Merkozy don’t particularly want elections to happen too soon (you never know, you could end up with a bunch of Commies holding the balance of power, etc. – and if you’ve seen that nutter Communist lady MP on the news over the past couple of nights you will know what I mean). They need a period of relative calm around Greece for a few months now before they then have to deal with making that default 50% figure a little larger. I’m not sure the Conservative party in Greece want that – they would prefer to have elections before Christmas and grab power back – but no doubt, a couple of heavy duty phone calls to their leader might soon slap him down.

However, as further austerity is imposed, more people suffer, targets start to go awry again (and they will), contraction continues instead of getting to any form of growth, etc. then as far as I’m concerned, all bets are off for the medium term (1-3 years). Best case scenario then is further default and worse case is leaving the Euro – and that still has to be a possibility.

On a lighter note, personally, I would be a lot happier if the Greek MP Eva Kaili were to take over running the country (she quit George’s party this week and is now an independent – see link below):

http://ibnlive.in.com/photogallery/3188-15.html

I’m sure Silvio would agree with me 😉

@ PR Guy

I wonder for how much longer the expansionary contraction crock is going to be rolled out for consumption, or should I say severely constrained consumption. As they say in Glasgow, you cannae polish a turd.

The real action is not Greece, but Italy. The FT seems to be dancing around this issue. It poses a particular problem for Cameron and Osborne as they must participate in the exercise of ring-fencing Italy while pretending not to do so.

Le Figaro has the most complete report.

http://www.lefigaro.fr/conjoncture/2011/11/03/04016-20111103ARTFIG00742-l-europe-met-l-italie-sous-surveillance.php

As Osborne told the BBC, this meeting of the G20 is unusual as the communique has not been precooked and negotiations will continue until the final text is released this afternoon. It is also notable that Obama is participating in meetings of the newly-dubbed “Frankfurt Group”.

On balance, Sarkozy has done better than Merkel on this occasion, couching his interventions in terms of the inevitable consequences that can flow from actions by the Greeks. Merkel, as usual, has shown no such subtlety, invoking a possibility that is totally at odds with Germany’s treaty commitments. As Draghi pointed out, there is no legal means to expel a member of the euro. It is curious how the letter of the law must apply when it is in Germany’s interest but can be treated frivolously when it is not.

Papandreou’s big mistake was to think that he could mix it in this company, a mistake that is without doubt attributable to the long geopolitical history of Greece and the dubious manner in which a lot of Greek debt has been run up to the benefit of French and German manufacturers on the basis of credits advanced irresponsibly.

Getting the EFSF in its new guise to work seems to be another major problem. Without an IMF back-stop, and some understanding as to the role the ECB will continue to play, with Draghi predictably being unable to concede an inch on this issue, it is difficult to see how this can be done quickly.

If the EU really thought Greece might default, they’d turn off ELA (both ECB and Greek CB), which doubtless has gone through the roof in the past few days.

@seafóid

“you cannae polish a turd”

I can if I have to 🙂

Yes, it belongs up there with the one about how everyone is going to export their way out of trouble and reduce their imports. I’m not sure if they have a saying for that in Glasgow but I can imagine what it would be.

I’m waiting for the big announcement from the G20. I presume something to do with the IMF and a big number – they are hung up on big numbers.
I can only assume that if the EFSF is already hitting the skids plus they aren’t going to get quite the leverage (or Chinese money) they thought they would then the IMF is going to have to have a big wadge of money handy just in case Italy falls over.

After various reports of Italy surrendering to IMF monitoring overnight, it’s nice to see the Italians denying it but saying this morning that they are looking to the IMF for ‘advice’. Those PR Guys…. tut.

I sometimes wonder what the world would be like if politicians, big companies, financial services, etc. just simply told the plain truth and there was no need for PR Guys. I’m sure it would be a much more interesting place.

@DOCM

“The real action is not Greece, but Italy.”

+1

That’s where the action is going to move to. If it hasn’t already.

There may be a bit of trouble with Greek banks coming up though.

The real action is going to have to be around preventing a depression. This time there is no government money to stop the rot.

It was previously suggested by commentators that there would be an immediate run on the Irish banks if Greece exited the Euro and that we would have to try for a simultaneous exit, or as soon as possible thereafter.

Does anyone have any views on whether that risk has receded?

To my mind, the contingent risk to Ireland has receded somewhat because (i) the troika has shown a willingness to restructure national debt, and (ii) the EFSF may be used for bank recapitalisation, and (iii) the ECB looks like it will have to liven up a bit, and (iv) it looks very bad for the EU if they throw swotty Ireland to the wolves.

However, for that contingent risk to have receded we would have to already have our plans in place. Juncker said the Eurozone is ready for Greece to exit the Euro. One wonders to what extent we have been notified of, or factored into, any contingency plans.

@ All

On the last point I made above in relation to the EFSF, there seems to be an idea abroad, and in surprising circles, that Ireland is somehow safe for the time being “out of the markets” in the arms of the EFSF. If things go wrong, and the pulled bond for Ireland is an indication that they could, the turkey could be very cold this Christmas!

Again, for the delectation of the aficionados this fascinating Alphaville link.

http://ftalphaville.ft.com/blog/2011/10/31/716816/work-out-where-the-money-is-with-these-handy-efsf-guides/

I used on another thread the metaphor of communicating flexible vessels with pressure on one increasing pressure on another and vice versa. The one marked France is full of hot air.

The idea of trading “Partial Protection Certificates” under the bond insurance apparoach, even to a layman, seems an idea that is rather unlikely to succeed. The SPIV idea, however, seems to offer possibilities (if my reading of the ESBies paper is correct).

@PR Guy, @DOCM

Looking att he graphic in the FT, perhaps the real country to watch in the context of a Eurozone exit is not Italy but rather Spain with its crushing unemployment.

Plan A, as far as European authorities are concerned, is to implement the agreement struck on July 21.

Just who are the ‘European authorities’ at this point?
Merkozy, the EU Commission, The ECB, the EU?

It looks to me me like King Sarkozy and Empress Merkel. What other mere mortals would take it upon themselves to ‘summon’ the democratically elected prime minister to an impromptu meeting and force him to abandon democracy in his country because it did not suit the wider interest of the empire.

At the same time as the Greek state ran out of money, the country’s banks would face collapse because their holdings of domestic sovereign bonds would be heavily written down. The European Central Bank could not accept defaulted bonds as collateral to lend to banks, since they would be worth little.

What kind of gibberish is the above given that a default will be accompanied by a return to the drachma. The Icelandic banks did ‘collapse’. There were new Icelandic banks the following day.

The Greek will not have to concern themselves with the ECB post default. The ECB will then possess stack of bondpaper that can be recycled to be used in their plush toilets.

This is a week that will be remembered by historians as a seminal week in history of Europe. We are back to the era of the ‘Great Powers’ riding roughshod over smaller states. This was new colonialism of the most arrogant and viscious kind. The message should not be lost on the smaller European states. It is now time for an anti Merkozy block in Europe.

The Greeks are now to be chained for a lifetime to debts that they have no hope of paying. A level of debts that Goldman Sachs knew far more about than most of the impoverished Greeks who are now expected to pay.

This is a very bad week for Europe. It is just as well that the only weaponry possessed by modern a Germany are economic missiles. We can be in no doubt after this week that the current leaders of France and Germany will use whatever weaponry is available to them to bring Greece and any other minnow to heel.

Good macro piece in the last Private Eye

“The Greek government admitted today that it would miss its target demanded by the troika of lenders to utterly obliterate its economy and create 100% unemployment. The troika said the total collapse of the Greek economy must be achieved if Greece is to qualify for billions more euros in loans which are needed to keep the country going due to the total collapse in the Greek economy. “

@ Zhou_enlai

Regarding Spain,

+1

I’m wondering how long they can sit quietly with nothing much happening.

When I heard about Papandreou being summoned by Merkel and Sarkozy to a three hour grilling on his referendum decision, the only thing that came to mind was the summoning of the Czechoslovakian President Hácha to Berlin in 1939 to hand over the republic wholesale to Germany.

Hacha was grilled by Hitler and Göring into the early hours, eventually suffering a heart attack and kept alive only by medical injections. In this state, at 4 O’Clock in the morning, he signed Czechoslovakia away to Germany.

I wonder what lengths Merkel and Sarkozy were prepared to go to with Prime Minister Papandreou, to prevent him from giving the Greek people a democratic say in their own future.

Is this the European Union that we all joined so many years ago? Is this the continent of solidarity, democracy, and equality which we were promised? Or are Europe’s smaller nations now to be vassal states for France and Germany once again, with their parliaments and peoples reduced to prefects and peasants? Unable to pass budgets, make policy, or even hold elections without central Europe’s say-so?

Once again, I feel this crisis has moved beyond a financial one.

The very foundations of the European Union are being smashed and shattered by the blunt mis-handling of the continents systemic banking crisis. It seems that politicians are quite willing to sink the entire European project on behalf of the banks. The question now is how the public feels–about the banks, and now about the EU itself.

FYI

http://www.iiea.com/blogosphere/the-legalities-of-eurozone-exit

Greece is, was, and will be European. What is required is a European Leadership that represents the interests of the EU & EZ as a whole (as distinct from the failed Gaullist Franco-German tango dictatorship), a properly functioning European Central Bank, and a reasonably engaged European Citizenry.

The real question in a referendum to be addressed by German and French citizens:

DO YOU WANT TO BE GENUINELY EUROPEAN? YES or NO

The rest of us will get to vote as well.

@DOD

The real question in a referendum to be addressed by German and French citizens:

DO YOU WANT TO BE GENUINELY EUROPEAN? YES or NO

The rest of us will get to vote as well.

+1

@ DOCM

if the EFSF still can’t issue by the end of Q1 2012, i’d argue that an Irish default is the absolute least of anyone’s problems. We won’t have failed, the entire EU project will have failed.

Complex paper from 1998 – but worth a shot at the mechanics
If not the conclusions in the end are worth a read.
papers.ssrn.com/sol3/papers.c…ract_id=115128

basically it states that both taxes and private bond purchases (citizen or commercial bank) drains reserves from the banking system or destroys them to be blunt. – it does not directly finance goverment.
It follows that if bonds purchases destroys money only the creation of new new high powered money finances the state.
The stupid Euro 3% GDP defecit rule increased consumption unsustainably via a lending leverage boom , it did not reduce consumption because it did not destroy enough M1 money at the time.
Now they want people to pay taxes or destroy more money after the money has been taken out of the system – go figure ?
The Euro had very poor architecture it seems – supposedly believing low gov defecits reduce spending when in fact it increases spending via the commercial banking sector

@OMF

“Is this the European Union that we all joined so many years ago? Is this the continent of solidarity, democracy, and equality which we were promised?”

@Joseph Ryan

“Just who are the ‘European authorities’ at this point?”

Quite clearly, the so-called ‘Frankfurt Group’ are running Europe now (Merkel, Sarkozy, Juncker, Barroso, Draghi, van RumpyPumpy and Lagarde – is that all of them?), on behalf of the banks (French and German banks that is). With the odd bit of ‘direction’ from Tim Geithner.

I see they met again last night in Cannes (about the 6th get together of this group in two weeks?), this time inviting Obama and Geithner to their deliberations.

People like Cameron in the UK, and other European leaders, are getting very nervous about this group and what they are getting up to.

@zhou_enlai

I was only thinking in terms of the markets smelling blood and where they would move on to next. You are undoubtedly right about the risks to the EZ posed by Spain. I have a lot of close links/friends there and the unemployment situation and the despair just seems to be getting worse – there’s a lot of pressure building up that’s going to result in what our dear leaders like to refer to as ‘social unrest’. The unemployed in Spain just lack a leader at the moment. I’m sure you know as well as I do how such vacuums eventually get filled.

@ OMF

When Draghi said the ECB wouldn’t be Lender of last resort to Greece I was thinking of the Soviet Army camped just outside Warsaw while the Wehrmacht and SS crushed the city’s uprising .

I was just reading in the FT that defaulting in Greece can be traced back to the 4th century BC when the Temple of Delos had to take an 80% haircut on loans to several Greek city states.

What was that about history repeating itself?

I think DOCM is right…Italy is the one to watch. Their 10 yr went out to 6.34% today, dangerously close to unsustainable…and that, presumably, is with ECB intervention.
If you look at the recent history of ECB intervention in Greece, Ireland and Portugal a pattern emerges of rates consistently rising until they hit crisis point.
Nothing out their today tells me the the EU,ECB,IMF have any credible plan to stop the rot.
Add to that the fact that the major European Banks are dumping PIIGS debt at an alarming rate (RBS today) leads me to believe that Greece is probably the least of the problems.

Ceterisparibus

“Add to that the fact that the major European Banks are dumping PIIGS debt at an alarming rate”

At an individual bank level it may make sense but when they all do it it’s insane. Another ratchet towards total breakdown. Nobody wanted World War 1 either.

JPM Cazenove on Ageas, the Belgian insurer

On Friday evening Ageas announced that it has decided to impair
100% of its Greek bonds (both pre and post 2020 maturities) down to
market value, which on average is equivalent to 38% of historical cost
(so a 62% cumulative impairment now). Previously Ageas had impaired
only its pre-2020 bonds down to 54% of cost.
 We had already assumed that Ageas would do this but the
impairment numbers are slightly larger than we had assumed as we had
underestimated the market value.  We believe that impairing 100% of its Greek bonds in this manner is the prudent and correct approach for the company to take, and thus view it as a positive event.

When this starts happening to Italian bonds the Rapture will begin

Listening to what’s coming out of the G20, it doesn’t sound like it was much of a success as a fund-raiser for the EZ. Lots of hand washing going on from the non-EZ countries there.

Apparently Silvio said that Italy is doing fine financially… “because all the restaurants are full.” He later said that Italians had become “impoverished” since the introduction of the Euro. You couldn’t make it up.

The EZ is starting to look weak and isolated – and its so-called ‘rescue package’, the EFSF, under-funded and inadequate. The wolves are approaching the door and woodsman Draghi has said it’s not his place to help and has put down his axe.

I am with some hedgie-types today and they have that funny look in their eyes as saliva is starting to drool from their mouths and they are throwing darts at a map of Italy.

@Ceterisparibus

“Where is the cavalry ?”

What’s really worrying is that it may be there. It’s out to 6.401 now.

The Yanks are kicking up hell on financial programmes to day because They think Obama is being asked for money to rescue Europe. First China says no and unlikely US will contribute. All a bit pathetic for Europe.
The FT reporting spike in Italian causing sentiment to turn sour and some plonker European banker calling for ECB to stop buying sovereigns. WTF.

Cameron: Greece must sort problems or leave euro

Merkel: Greece must accept deal

Dogs on the street in Athens : austerity isn’t working

@ All

Amid all the hurly-burly, herewith a link to a timely article by Gillian Tett of the FT on the issue of the mis-pricing of sovereign debt.

http://www.ft.com/intl/cms/s/0/88151ed6-0639-11e1-a079-00144feabdc0.html#axzz1c5fPdDgx

Again, referring to the ESBies paper, this one of the central issues which has to be tackled at a global level.

Merkel is, incidentally, selling the outcome of the G20 meeting (which bears a startling resemblance to a meeting of the EZ17) as, you guesed it, making the wicked bankers pays instead of the taxpayer.

@PR Guy
Thanks for the link.

That was written by the Yanks.

We Commit to an ACTION PLAN FOR GROWTH AND JOBS.
And later an Action plan for corruption.
They love action plans.

Watch for Mickey Noonans Action Plan.

Angela Merkel knows more about living in a tyranny than those who casually seek to link recent events with the Nazi era.

In fact the recent euro threads evoke the rumble of the tumbrils on the cobblestones of Paris’ Place de Grève, that gave heart to the knitting women, embellished or not, in the writing of Charles Dickens.

Let’s wait for the next bit of gloom to quote from some ‘expert.’

So ladies sparing you any of the real serious stuff, the FT’s Tony Barber begins a piece today: “Europa, in ancient Greek myth, was a maiden princess seduced by Zeus, the supreme god, who assumed the form of a white bull and whisked her off to Crete. In today’s European debt crisis it is open to question who is shafting whom.”

Beyond the blather, from my own experience of life, people are much more liberal about spending that which is not their own than they are about what they own.

Is there a sensible financial solution to the Greek Debt issue.

How about freezing all Greek bond price at todays market price.
My hunch is that it would be about a 60+% loss on nominal on the bond mix.
The ECB to underwrite todays market value.

The European banks (including ECB, IMF etc) take the losses and let the chips fall where they will.
That would be sufficient to resolve the Greek problem.

@MH

Angela Merkel knows more about living in a tyranny than those who casually seek to link recent events with the Nazi era.

For a lady that knows about living in tyranny, she does not display a great deal of enthusiasm for the democratic system she was ushered into by great European statesmen like Helmut Kohl.
Proir to Merkozy, the EU/EZ at least gave the semblance of democratic decision making.

@ CetPar,

” Their 10 yr went out to 6.34% today, dangerously close to unsustainable…and that, presumably, is with ECB intervention.”

It seems the ECB is capping Italian yields @450bps spread over 10yr bund to avoid Clearnet’s collateral calls.

@ Joseph Ryan

she does not display a great deal of enthusiasm for the democratic system

This is thrown up as a debating point to support a particular viewpoint.

Greece or Ireland can decide to be part of a multilateral system or not.

Greece wanted to hold a referendum in January but needed funding in the meantime.

So on a crucial issue of protecting the EMU system which the government of Greece signed up to on Oct 27, there was no obligation on the latter to comply with that agreement but there was an obligation on other democratic governments to pony up funding to keep the economy going?

What do you mean by ‘democratic decision making?

Plebisicites, heads of government, parliament?

Again I stress, you make no reference to what has to be the basis of a multilateral system and the related obligations of individual members.

It’s therapeutic to have the likes of Germany and France as the scapegoat for our woes…the bitter truth of course is that there would be little chance of reform without pressure from their agents.

It should also be remembered that the Tammany Hall system, the machine model adopted by Fianna Fáil, was once regarded as democracy.

@MH

“the bitter truth of course is that there would be little chance of reform without pressure from their agents.”

Based on what happened this week it seems paying off Anglo bondholders takes precedence over reform.

the people calling the shots don’t really give a **** about reform anyway. The IMF doesn’t get a look in .

@ Ahura

“It seems the ECB is capping Italian yields @450bps spread over 10yr bund to avoid Clearnet’s collateral calls.”

Thats actually something that has been lost in translation of late (trust me, a lot of people getting mixed up on this) – its a spread of 450bps over a “triple A basket of eurozone govvies”, so there is still some room to go yet (ie still 330bps over France, so if we had a 50/35/7.5/4/4 mix of DE/FR/NL/AU/FI in a basket i reckon we’d be at around +425bps)

Obama at his press conference just now: “There are just a lot of institutions here in europe…. There are a lot of meetings in Europe too…”

PR translation: “How do these turkeys ever get anything done or agreed around here?”

Which is pretty rich coming from him given what’s been going on in US politics of late.

@Ahura Mazda

“It seems the ECB is capping Italian yields @450bps spread over 10yr bund to avoid Clearnet’s collateral calls.”

As I suspected, the ECB were there and it was still spiking. Does that mean they are only doing what they really have to and no more?
I wonder how much they’re having to spend to do that?

@All – when does Noonan release his pre-budget analysis today? Anyone have a link?

I really must wrap up soon, find my ticket and get off to a pub near the Aviva stadium. C’mon Leinster.

@Ahura
Thanks. That would explain their actions or lack of.
The whole G20 thing looks like a fiasco. Monday should be interesting in the marketplace after some reflection on the non events and after the results of the Greek vote tonight.

“so if we had a 50/35/7.5/4/4 mix of DE/FR/NL/AU/FI ”

There were 6 in the bed and the little one said “no debt rollover”
So there was no debt rollover and Italy fell out
There were 5 in the bed and the little one said “no debt rollover”
So there was no debt rollover and France fell out
After which the bed rolled over

@ Eoin Bond,

Good clarification. I’ve a couple of follow-up questions 1. What does Clearnet accept as collateral? 2. If a collateral call is triggered for Italy, roughly how much will need to be posted and how quickly?

I’m assuming that a collateral call shouldn’t be a significant event (in and of itself). That this short-term ‘target’ is a visual thing the ECB would prefer the markets not to witness.

@Michael Hennigan

I follow the German press and I have come to the conclusion that the German public do not know what to make of Merkel, a fact that has been reflected in her repeated inability to get a solid working majority for the CDU-CSU. It is no accident, however, that she is often qualified as a “wendehals”, after a bird that can, apparently, turn its neck 180 degrees. The term is widely used to describe the ease with which many former politicians of East Germany changed their political views.

This public ambivalence is also reflected in the inability of the German press to come to a view, Bild, by way of example, referring to her Merkules while others – and certainly international leaders – take a decidedly different position.

What she has succeeded in doing is making the German electorate extremely nervous.

It is by now also quite clear that the phenomenon Merkozy is getting up the noses of popular opinion across Europe (my barber volunteered his displeasure spontaneously to me yesterday) and this cannot be without political consequences.

However, the real problem is that the analysis of the crisis by the governing coalition in Germany is just plain wrong. The markets are about to demonstrate just how wrong it is.

At the same time, there is the paradox that changing position to suit the occasion can also have its positive side. The language of the G20 communique includes, for example, language that would not have been conceivable for Germany even a few weeks ago.

“We welcome the decisions by European Leaders on October 26th, 2011 to restore debt sustainability in Greece, strengthen European banks, build firewalls to avoid contagion, and lay the foundations for robust economic governance reform in the Euro area and call for their swift implementation. We support the measures presented by Italy in the Euro Summit and the agreed detailed assessment and monitoring by the European Commission. In this context, we welcome Italy’s decision to invite the IMF to carry out a public verification of its policy implementation on a quarterly basis. Taking into account national circumstances, countries where public finances remain strong commit to let automatic stabilizers work and take discretionary measures to support domestic demand should economic conditions materially worsen. Countries with large current account surpluses commit to reforms to increase domestic demand, coupled with greater exchange rate flexibility. We all commit to further structural reforms to raise output in our countries. Monetary policies will maintain price stability over the medium term and continue to support economic recovery”.

Berlusconi seems not have even read the text which is an indication of just how dangerous these badly-prepared international jamborees are becoming. The saving grace is that the files have now to go back to those actually capable of dealing with them; the institutions of the EU, including the ECB.

Maybe Merko needs time to bring around Bild. They didn’t like Mario either. It took a long time for them to put him on the front page with a Prussian helmet.

@DOCM
“However, the real problem is that the analysis of the crisis by the governing coalition in Germany is just plain wrong. The markets are about to demonstrate just how wrong it is.”

+1

As demonstrated by Germany curtailing IMF flexibility on SDRs.

Lagarde says Italy’s reform proposals are ‘not credible’

The Frankfurt group really are out to get rid of Silvio.

They must have one of those five point plans:

1. Get rid of George
2. Get rid of Silvio
3. Get the rest of the G20 to stuff loads of money into the IMF to use on bailing out Italy etc.
3.1 Er, the plan’s fallen over

@ Ahura

1. What does Clearnet accept as collateral?

Cash, the major govt bonds, major equities, so collateral is fairly wide. The problem is that the basic idea behind repo-based investing is that you borrow long (ie 10yr italy) and fund short (ie 1wk repo), and make both liquidity spread, upward sloping curve spread, as well as the now large credit spread in between. But they’re all relatively small in the grander scheme of things and only work on the assumption that you can fund with a small haircut, ie a few per cent max. If the haircut becomes 15-20%, ie you are receiving 80 cents in funding against an original investment of 100 cents, all of a sudden you have to borrow an additional 20 cents to keep yourself funded, and this makes the whole trade unprofitable. As a result, a lot of guys head to the door, and there’s probably a lot of front running of this situation. (Interestingly, there was a lot of front running selling of Irish bond when there was a danger they were going to be kicked out of investment grade bond indices during the summer, but this subsequently never happened and Irish bond have rallied on the short covering).

2. If a collateral call is triggered for Italy, roughly how much will need to be posted and how quickly?

Not sure what the exposure is in terms of bonds held under LCH. The amount of the collateral call is less of an issue, and more a case of marginal buyers of Italian govvies suddenly exiting the market. You could still go to the ECB repo window, but there’s still a stigma against that.

Again I stress, you make no reference to what has to be the basis of a multilateral system and the related obligations of individual members.

Well, individual sovereignty and independence was originally a petty fundamental basis to the Banking Putsch Formerly Known As The EU, but obviously that particular requirement is no longer as important to their Imperial Majesties in Cannes.

The Putsch is perfectly happy with “Peripheral” nations like Greece being reduced to vassal states in the new order of the continent.

Looking at a chart from BOA on Greek debt repayment schedule, it would appear that the game is up anyway..

“The country has €2bn of bonds maturing on November 11, €1.6bn on November 18, €2bn on December 16, and another €2bn on December 23.”

So even if they get the 8b, they won’t have enough to finance the deficit. But the daddy of them all is a debt repayment of 17b on March 12 next and two lots of 10b each later in the year.

So without the haircuts or total rescheduling now they are up the creek.

@DOCM

re “The real action is not Greece, but Italy.”

It seems from the Le Figaro link you provide that Italy are effectively in ‘The Program’, except that in order not to frighten the horses it is not being called ‘The Program’. A little more sensitivity is required when dealing with larger countries!
In that sense your are correct.
However in terms of sovereignty and self determination, the derision of and the forced reversal of the Greek plebiscite will remain an open wound in the EU for a long time to come.

Merkel, as usual, has shown no such subtlety, invoking a possibility that is totally at odds with Germany’s treaty commitments. As Draghi pointed out, there is no legal means to expel a member of the euro. It is curious how the letter of the law must apply when it is in Germany’s interest but can be treated frivolously when it is not.

I am glad Draghi has said that as, being out of touch for a few days, I had heard glimpses of Greece being forced out of the EU.

It is a long long way from the Pro-European, positive, selfless attitude of the Germany that I recall from the 1980s and 1990s.

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