The ECB on Bank Bonds Post author By Philip Lane Post date November 14, 2011 The role of long-term debt in the funding of banks is addressed in this article in the latest ECB Monthly Bulletin. Categories In Uncategorized 45 Comments on The ECB on Bank Bonds ← Global Liquidity → FT on Euro Crisis 45 replies on “The ECB on Bank Bonds” Interesting article. A quote from 4.3 Implications for stability and bank regulation: “One key lesson from the crisis is the need to regulate banks so as to avoid excessive liquidity risks through a disproportionately high reliance on short-term funding.” I’m not so sure that the problem for banks is liquidity risks. Liquidity has been injected so if liquidity was a problem then the problem would have been resolved. It seems more like they made bad loans and as a result some are experiencing a solvency crisis. Banks should have been regulated harder but not on the side where they are raising money, they should have been regulated more on the side where they lent out money. Banks increase their profits through leverage and leverage also increase the size of their losses. Limiting the legally allowed leverage on risk capital seems like a logical thing to do. Also, reducing the legally allowed leverage can be done by national legislators so the need for involvement of supranational bodies would be reduced. Rather than converting bonds into equity when there is a crisis it might be better to convert bonds into equity during the booms. Lex on European banks http://www.ft.com/intl/cms/s/3/58e2b920-0ebd-11e1-9dbb-00144feabdc0.html#axzz1dftePpTz Clean up the mess before you see any more money, honey , is the message @Philip Lane The above report produced by the ECB says more about the sheer ineptness of the ECB than anything else. There are 18 Charts, only about three of which are legible. These are charts 16, 17 and 18. The rest are clearly not meant to be read. If a newspaper sub-editor put this material into publication, he would get fired. Charts 16 and chart 17 are of course the ‘PIIGS charts’. The only conclusion be drawn is that the countries segregated together in charts 16 and 17, are very much viewed as PIIGS with the framework of EC analysis. In ECB eyes this is the PIIGS group. Still chart 17 appear to say that even in PIIGS countries, over 25% of all banks bonds issued are unsecured. A disingenuous chart. The figure for Ireland is probably zero and for Greece is also probably zero. So why place these countries together. Chart 16 on a plain english reading is not only unintelligble but probably incorrect. Nowhere in this article is there a simple explanation of the reality. Unsecured bonds are finished in all but biggest banks. And nowhere in this article is there a mention of the downstream effect that the switch from unsecured to secured lending has on the securiy of depositors. This is a unintelligible disingenuous article from the ECB I have a new solution to the debt crisis. Kick Germany out of the euro.It solves about 90% of the problems. The problem was caused by German, French and U.K banks with bad risk analysis. Summon Merkel to Dublin (or Rome), and tell she is gone unless she allows the ECB to print euro. Let the mighty Mark die as the Yen did in a massively overvalued currency while the rest of us get on with building a productive economy for the benefit of all citizens. Kick the Germans out for a trial period until they show dinner for one on New Year’s Eve and see how they like it. I imagine the exporters would be the first to squeal. @Joseph They cannot be that stupid. The more and more I look on the ECB the more I think they are a City of London creation – conceived to strip the European continent bare. The whole Gaullist thingy of taking on the FRN was a nessary illusion to carry sections of the continental European poltical elite rather then financial elite which came along for the ride of a lifetime @Seafoid I pity the pure Germans really , Lord forgive them for they know what not they do and all that. The pure buggers have been exporting their goods and savings when they could have spent it on themselves either in personel consumption or capital spend. Its really the Anglo world controlling the barbarians. Its no accident the 2 modern prototype mercantile nations was Germany & Japan. The 1990s was certainly a strange time – there is something very dark withen the euro that I can’t quite put my finger on. It was the whole confluence of events – the Rubin “strong” dollar policey which created massive malinvestment as people were forced into private debt. The Dark Blair years. The selling of truely massive amounts of SNB gold , UK treasury Gold , even French Gold in the noughties. Who were the buyers ? The retreat of the Rothschilds from the London bullion market in 2004. Theres another Robert Harris book in this me thinks – but it all goes back to the IMF destruction of England in the 60s & 70s – with the Labour goverments the willing handmaidens of capital destruction until the monetarist Tory boys continued the holy mission. The ECB may just have provided us with a solution to the the Euro crisis. It transforms itself into a “think tank” which spends most of itś time producing reports which can be “consulted” by member states of the European Union as they try to untangle this mess. To save on “red tape” it could even keep the two first names in its title and the first letter of the last word. I think Bu…..t is understandable in every European country. It could even introduce “dress down fridays” and change the name of its new senior executive social club from Frankfurt to “Hotdog”. Of course to be more “efficient” (and increase itś chances of maintaining a steady supply of European grant aid)it could submerge the “Hotdog club and call itself the European Club of B……..ers and combine regular “crisis” meetings with “dress down fridays”. I am almost tempted to bet my solitary Transnistrian Ruble that this “report” is not worth its weight in New Drachmas or new D Marks. 🙂 Joseph Ryan The charts look perfectly legible on my screen. P88 “All in all, markets involving short-term unsecured wholesale funding or “non-liquid” assets, such as other bank bonds and low-quality non-ﬁnancial corporate bonds, are likely to be curtailed” which in central bank research speak mean kaput (except for the caveat given earlier in the paper that larger banks/more credit worthy country originated banks have come through better). I like a good conspiracy story but i think its clear that the article is clearly not one. @Phillip Charts not legible on my screen. “which in central bank research speak mean…” Yep. Thats the problem. Some of the Irish appear happiest when the begging bowl can be filled by Europe or the US. What can be fixed at home will never generate the interest that the perceived obligations of foreigners does. The former Fianna Failures of course find the scapegoating narative compelling. Fintan O’Toole has a balanced analysis of the situation, today: http://www.irishtimes.com/newspaper/opinion/2011/1115/1224307583055.html Joseph Zoom in… Also, it’s a research publication, not a journalism piece. Spend some time carefully parsing it, it will reward you. Zoom in in other words @ Michael Hennigan It looks like only a matter of time before the markets take down Austria and France. The story is much bigger than Ireland now. I saw an interesting letter to the NZZ am Sonntag. Mr Martin Creydt of Kanton Schwyz thinks that it would not be the end of the world if Greece fell back to the GDP per head level of Slovakia. It’s capital vs labour innit. @seafoid Germany is, if not next, then soon. We might see some action at that point. @Micheal You might as well blame some mildly retarded people for taking opium………… This misallocation of capital is global in nature & multi decades in gestation Perhaps it is the Easts revenge on us all. isn’t it amazing that Europe’s policy of having no bank fail has led to a total seize up in capital markets funding of european banks? @hogan “Germany is, if not next, then soon. We might see some action at that point.” I wonder will it be due to a property bubble bursting.. or do they know something we don’t yet? Maybe just Munich. “….looking for an apartment in Munich can also be a sobering experience. The Karlsplatz penthouse goes for a monthly rent of €19,000 ($25,700), plus €1,300 in expenses, and the security deposit alone is €57,000….” http://www.spiegel.de/international/germany/0,1518,796821,00.html @ A-Mac i went to Germany a few years ago (i reckon 2007) to look at some property for my brother, it was ridiculously cheap relative to Irish/UK, at least at a headline price level. Don’t think there’s any major domestic bubble to burst, all the bad loans were made overseas, and yields blowing out EVERYWHERE now will mean that German banks will be nursing an awful lot of undeclared losses. A-Mac & Eoin “yields blowing out EVERYWHERE now will mean that German banks will be nursing an awful lot of undeclared losses.” Yeah, this and phenomenal amounts of inter-bank senior unsecured debt in the German banking system (i.e. between German banks). Once the virus hits, the German government will be left with the option of ponying up or what. Ponying up will destroy the sovereign rating, I reckon. Are they as foolish as they’ve made everyone else be? I dunno. Probably. @all FYI Sinn Féin: Route to Recovery: Pre-budget Submission 2012 http://www.sinnfein.ie/contents/21927 @ECB Decoupling bank debt and sovereign debt The Irish Banking crisis 2008-2011 has been catastrophic for the economy and wider society. The state has recapitalised the banks to the tune of €63 billion. The banking guarantee is still in place and the state intends to use taxpayers’ money to pay all bank bondholders to the value of €62 billion over the next number of years, including unguaranteed and unsecured bondholders. The €30 billion promissory note to Anglo and Irish Nationwide is to be repaid at a total cost of €74 billion by 2031, including the capital repayments, the interest on the capital and the interest for the Government to borrow the money. Economists argue this figure could reach €85 billion. In the same bank, 22 of the top senior Anglo figures during the lead in to the crisis still hold their jobs, with 19 of them earning salaries in excess of €175,000 per annum. So long as banking and sovereign debt are tied together, the Irish banking sector and by consequence, this state’s finances and the economy, cannot and will not function effectively. The Irish people and not private shareholders own the majority of the Irish banking system. Those banks need to operate on the basis of serving our economy and maximising the potential of the state. http://www.sinnfein.ie/bank-and-sovereign-debt @ hoganmahew & EB, The role of the Eurosystem intra-euro payment system is enabling the repatriation of the Core’s private capital with little loss. The initial flow of private wealth to the periphery has caused most of the problem and the intra-euro payment system is the conduit for the safe return of these funds. Leaving the losses to be picked up by the periphery’s taxpayers. So, yes, there are mark-to-market losses at present but as these debts mature the cash is being sucked back to the core. These funds then get lodged at the bundesbank which are then available to the ECB; enabling more sucking of funds back to the Core. It’s hard to see this process stopping. Net positions of Eurosystem central banks against the ECB: ________________________________________________ Country / END 2010 / Aug/Sep 2011 Germany / 325.6bn / 449.6bn Netherlands / 40.5bn / 64.8bn Finland / 19.7bn / 43.4bn Italy / 3.4bn / -103.5bn France / -28.3bn / -33.5bn Spain / -50.9bn / -82.8bn Portugal / -59.9bn / -59.4bn Greece / -87.1bn / -97.5bn Ireland / -145.2bn / -140.6bn http://www.irishtimes.com/newspaper/opinion/2009/1229/1224261354227.html By 2015 we will have seen what happens when jobs disappear forever . . .Ireland is at the start of an enormous, unplanned social experiment on how rising unemployment affects crime, domestic violence, drug abuse, suicide and a litany of other social pathologies.” Morgan Kelly, December 2009 And it now looks like the rest of Europe will be joining Ireland @David Thats a old debate now – we have sunk deeper in the bog. The ECB itself has decoupled from sovergin money !!!!! and yet at the same time will not bid up private money to destroy debt. That means not enough money is available as a medium of exchange and you get commerce / life support failure. The longer it resists the deglobalisation momentum the shorter our lives will be. It must relent from its very profitable for its clients – global wage slave doctrine Its a Frankestein like creation with no connection to the state and yet with massive poltical power. I hope this is politically unsustainable but perhaps the madness & power has gone to their heads – they certainly have huge poltical ambitions , before bankers controlled states indirectly via the money power but now they want direct control of the poltical machine !!! Even I am shocked at this malevolent open use of power. We need to decouple from the ECB and do a deal with the BoE. @The Dork Let’s see how An Taoiseach provides an education on vichy_banking system debt, genuine sovereign debt, and German capital flows to periphery, to the German decision making classes this week. Looking forward to a thread on these ‘speeches’ here. In worst case scenario – which is becoming more probable by the day – I tend to slightly favour a deal with the Northampton Saints or the Leicester Tigers over the Dallas Cowboys …. and we are well beyond 41 phases in the present madness … CDS Premia …. for Ireland data are only available for ONE bank! ??? Geithner, Trichet et al – No Triggering of CDS? I’ve yet to see an explantion of this one – that me humble mind might even slightly understand …. The Dodgy Derivatives Time Bomb, may I assume, still exists? From Draining the Shannon to Reform of the Global Financial System … Serfs really are in a Matrix … Maybe the ECB masterplan is to force all EZ banks to feed off its cash nipple . It could become known as the Teat Offensive . @EoibBond Three years is a long time in an economy.. This is from May this year … even Berlin has joined the party. As Shaw said “We learn from history that we learn nothing from history” http://www.spiegel.de/international/business/0,1518,760105,00.html “Property Boom in Top German Cities The German real estate market is booming in Hamburg, Munich, Düsseldorf and Berlin. Large brokerage firms such as Engel & Völkers have reported record sales. “A lot of people are currently withdrawing their money from the bank and investing it in residential real estate,” says Jürgen Michael Schick from the German real estate industry association IVD, “and this trend will continue throughout the year.” Investors are not merely interested in buildings and residential properties, but also farmland and forests. Some property dealers are currently reaping enormous profits. “We’ve seen a massive increase in land value,” says real estate agent Dirk Meier Westhoff, “especially in eastern Germany.”…” Crisis over. Consumer confidence has jumped. http://www.esri.ie/irish_economy/consumer_sentiment/latest_consumer_sentiment/ Seems hard to understand the reasoning behind such an improvement in sentiment. Will it last through to next year I wonder? @all Is Jens Weidmann more powerful than Mario Draghi? Jens Weidmann, the new president of Germany’s Bundesbank, is strongly opposed to making the European Central Bank the lender of last resort in efforts to prop up the common currency. It’s a lonely fight, however, and the pressure from Germany’s European partners is intense. Some warn that Weidmann’s course could end up destroying the euro. By SPIEGEL Staff. http://www.spiegel.de/international/europe/0,1518,797666,00.html Ja! @Carson I wonder did they get the numbers right or perhaps the 3.5b find made everybody feel good. Totally at odds with what I’m hearing. @all The Greeks are cracking down hard on tax evaders. They have been given 10 days to pay up or their names will be published online. http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_14/11/2011_414776 On that Fintan O’Toole article…I agree with him on the two solutions that will not work.. But the solution proposed will not work either with the present incumbents of the ECB? @DOD Our posts crossed but I’m essentially saying the same thing, although I do not think he is all alone…Angela knew his form when she appointed him. But is it a giant game of bluff orchestrated by Germany and the ECB to get the weak one to toe the line? It increasingly seems so. @Ceterisparibus Yes – but imho Jens Weidemann is now by far most powerful (human)being in EZ – Speigel piece is good – and Jens is correct that Italy has the wealth to sort itself out …. but waiting for the French downgrade and the loss of its AAA … if not then – when? And the gamblers are out in force again …. meanwhile the frog is neat critical as the temperature of the water hits the point of no return …. All Germans toe this line rigidly – gifted to them by the USA post WWII …. it will go to the wire and if not for turning we have no option but a coup and a massive default …. Weidemann ruined the hopes and aspirations of wealthy Italians when he said they have the resources to deal with their own problem. This was a brutal blow to wealthy individuals who were avid supporters of Berlusconi. With Mr no taxes are the best taxes gone they now stand naked before the socialist hordes who will demand that they pay the piper. The position JW has taken was carefully thought out to go down well with the German public and the Italian working class. It will take time to get the genie back in the bottle and it is quite possible that damage control by the wealthy will not be effective. In either case a lively debate will rage for some time in Italy. @David I very much doubt the Leprechaun President is having a secret council in Mullingar Army Barracks at the moment. We are a caricature of a country , always were – no liathroidi I am afraid. The curious Irish mix of Second Class Masons & Gombeen men is better off running towards John Bull now as they seem incapable of doing anything substantial or forceful unless there is another Great war or some such and none off us want that. The big question as always is what in Gods name are we going to do with the working class Unionists ? Maybe if the Gulf stream shifts the rest of us southerners can move to Newfoundland or somewhere – our “Brethern” can have Cork which will then lie just below the Eurasian Ice Sheet. But I think I will move further south when this Volcanic island cools down again. http://www.youtube.com/watch?v=0QHYFXDGf4Y The greater the number of countries involved in the sovereign debt maelström, the higher the probability that the majority on the ECB board will shift decisively. Therefore, I regard today’s developments on the bond markets positively. Let’s all hope it gets quickly worse for France, Belgium, the Netherlands and Austria. Except for Greece, I have consistently argued that this crisis was not a solvency crisis, even for Ireland. Now, my view is that this crisis is a crisis of monetary policy more than anything else. I found a copy of the FT from 15 oct – ie less than one month ago. US equities had a good week on hopes that “the slovakia vote would lead to a resolution of the EU debt crisis.” Where did it all go wrong ? Nobody knows anything. Nihilism is the new black This film could be about Germany and the peripherals Balance 1989 by Wolfgang & Cristoph Lauenstein Magnificent @Seafoid Magnificent. Where do you get them. @ Ahura It looks good on paper but the periphery has a breaking point. You don’t get a sense of that in this country because we’ve put up with the Brits for 800 years and are used to being looted. The Italians and Spanish are different. They’ve had to put up with the national socialists. The process you describe puts the Euro under irresistible strain. It will break like an elastic band BTW great result tonight. A country aware of its limitations and willing to fight. I’ve never seen Ireland more at ease with its own identity in my lifetime. Vive la Republique Its getting scary out there tonight with some of the stories being told….. “The prospect of a eurozone breakup intensified on Tuesday night as borrowing costs around the region soared and the Dutch prime minister said it should be possible to expel some members from the currency union. Investors are rapidly losing hope that a solution to the sovereign debt crisis will be found, and their fear was demonstrated by rising bond yields – the rate of interest governments have to pay to borrow – across almost all single-currency countries. The Dutch premier, Mark Rutte, stoked fears that a collapse could become a reality as he aired the prospect of countries being ejected, albeit as a last resort. “We would like countries to be able to be pushed out of the eurozone,” Rutte said on a visit to London, adding member countries must “put out the fire” of the debt crisis. As analysts warned of “terror taking hold”, even some of those countries until now regarded as safe havens, such as the Netherlands, came under pressure as fears about countries’ creditworthiness spread from peripheral countries such as Greece into Europe’s core. One bond expert described this as the most worrying day yet in the crisis. Mike Riddell, manager of M&G’s international sovereign bond fund, said France was now suffering a “full-blown run” on its debt, with investors dumping French bonds to move their money to safer havens. Riddell added that the credit default swap (CDS) market – where investors in effect bet on the prospects of countries going bust – now indicates that the chance of France losing its coveted top AAA rating is a near certainty.”. ……from the guardian And the Swiss sold 6 month bonds at -0.3%. @Ceter Its what you get when you don’t destroy “risk capital” for taking the wrong risks. The Unicredit whistleblower is out – where was Today Tonight ? or whatever they call it these days. http://www.abc.net.au/foreign/default.htm It is interesting that Mark Rutte would roil the markets even more as the cost of CDS to insure Dutch bond risk has risen dramatically. Europe is plagued with clownish politicians in high places. @ Eureka, I got my numbers from this report: http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000279906/Euroland%E2%80%99s+hidden+balance-of-payments+crisis.pdf It’s worth a read, though I don’t agree with much of DB’s analysis. One valid bit is that Germany is likely to be in the minority on the ECB board. The graph on page 4 (Claims of the Bundesbank against the ECB) and the table on page 5 are very useful. @Ahura Interesting but very skewed and politically motivated analysis from Deutchse Bank. They know what team they are on. The analysis is I think very similar to Dr Sinn which Karl Whelan has rebutted on a number of occasions. The analysis also excludes the following from its lists of solutions. Force the creditor countries to buy back the bonds that are not in domestic hands. In the case of Germany this probably amounts to about 1000billion. That would change the BUBU “claim” on Target2 pretty quickly. The problem is that Deutsche Bank and Germany want it both ways. Hard cash for their BOP surplus, but still be able to sell their bonds to foreigners. Somebody should remind Deutsche and Thomas Meyer, the author, that Germany could sort the problem by buying back it own bonds from foreigners to offset the surpluses. How about that for a solution. On a political analysis, I would say that Germany has been pulling out of the Euro for some time. Its policy has been to bring home the assets since the crisis began. Nobody has done this faster of more thoroughly than Deutsche Bank. @ Joseph Ryan, I agree that it would be a solution, but I can’t see it happen. A large part of the problem is that only part of what has gone wrong is highlighted. “It’s the profligate PIIGS what done it”. But this isn’t the whole story. Private capital flows from the Core is where the problem began. The problem is intensified by easy and safe passage back to the Core. And it seems to be accelerating. Comments are closed.