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While some believe the ECB's new collateral and loan rules amount to a backdoor QE, allowing...

While some believe the ECB's new collateral and loan rules amount to a backdoor QE, allowing banks massive firepower to purchase sovereign debt, the banks themselves think differently. "When investors are constantly asking what you have on your books, and the board is asking you to reduce your exposure, it doesn't really matter," says the treasurer of a major EU bank. "Am I going to buy Italian bonds? No." (see also i, ii, iii)
Comments (19)
  • This is exactly why the ECB or IMF has to step up. When a market acts illogical you can't just let it fail. Italian bonds remain very safe, but after MF boards just aren't going to take them on.
    18 Dec 2011, 07:18 PM Reply Like
  • Yes, you can let it fail..


    If the EU community would commit to some / any form of fiscal responsibility I bet they could find some financing, As it stands right now they are looking for a hand-out while not changing their irresponsible socialist behaviors.


    Any help from the ECB or the U.S. FED / IMF only delays the inevitable failure of the EU.
    18 Dec 2011, 09:02 PM Reply Like
  • Isn't the real question whether or not they will roll over the Italian debt? If they don't then they might have a huge loss as Italy defaults and if they do then they get to live to fight another day.
    18 Dec 2011, 07:55 PM Reply Like
  • I read in Market Currents last week where in the first weeks of Dec., EU banks "swapped" for 58 Billion at the Federal Reserve "exchange window". Now what on earth did they "exchange", Euro's to dollars, that sounds like a US TARP like finance of the EU bailout to me. Now what happens when the Euro falls flat through the floor and we are holding ( God and Ben Only knows) perhaps as much as 200 to 300 Billion Euros, and the EU banks have spread our dollars out on deposit withdrawls,,,,,or perhaps even buying more EU debt bonds just to head off an "un-orderly " default by Italy......Watch out for the downgrades that are being stacked to go out after the close next week, and the ones that went out on Friday after the close that may not have been discounted by the markets yet.. Merry Freaking Chirstmas.
    18 Dec 2011, 09:08 PM Reply Like
  • Well, I'm usually wrong, but if the EU banks can buy Sovereign bonds that are 30% guaranteed via the EFSF, with cheap 3 yr money from the ECB at say 50 bps above the Bund ... Surely, that's the backdoor QE/Eurobond ??? Am I not 'getting' something here, or will the market pretend that it didn't notice for a few hours, before going up like a rocket, when nobody is expecting it?


    Hey, with a 30% guarantee, the bonds would still be safe if the Sovereign left the Euro!?
    18 Dec 2011, 09:27 PM Reply Like
  • However, if the consequence of the above is a surge in the Dollar, maybe there will be a big plunge!
    18 Dec 2011, 09:54 PM Reply Like
  • drposh,
    How is the EFSF going to guarantee anything, much less 30%, when they are having trouble even getting their own bonds issued. And they apparently have raised only a few billion euros themselves to begin with. The Italian and Spanish debt needing to be refinanced/rolled over alone in 2012 dwarfs anything the EFSF even remotely has in place at this point. Much less any other EU sovereign debt. The EFSF is virtually dead at this point in time.
    18 Dec 2011, 10:21 PM Reply Like
  • Well, I don't know, when bankers make public statements about not buying bonds, it sounds suspiciously like they're trying to deter people from frontrunning them?
    18 Dec 2011, 11:57 PM Reply Like
  • dr,
    Well there is an article in market currents on SA today by an EU banker clearly stating that they have zero interest in purchasing EU sovereign bonds at this time. Other articles indicate EU banks are rapidly delevering and selling as much as 20% of their assets, so why would they be interested in buying more assets when they are in fact selling as fast as possible. And lastly, other articles indicate that EU banks themselves have as much as 1 trillion in self-bank debt to rollover/refinance in 2012/13 and as such they are using every available ECB financing method just to attempt to deal with their own bank debt.


    The simple fact is that there is just not enough financing in the EU to deal with all the debt issues of sovereigns and banks. Not to mention the huge pressure on banks to meet increased bank capital requirements and deal with potential losses on bad sovereign and real estate debt.


    It thus appears highly unlikely that EU banks will be purchasing much EU sovereign debt issue anytime very soon. And even if they do some, certainly not anywhere near in the amounts needed to deal with EU sovereign debt rollovers and new issues.
    19 Dec 2011, 02:28 AM Reply Like
  • Well, if the EU banks can borrow at say 2% (or just above Bunds) from the ECB to buy 800 billion Euros of Sovereign debt at say 7%, when that debt is guaranteed up to a 30% loss via the EFSF ... And, by doing so it will increase the value of their current bond holdings, and hence their capital ratios ...


    If the EU banks don't want to do it for some reason, I'll gladly volunteer to setup a new Eurozone bank, do the transaction and make a 5% spread on 800 billion Euros for the next 5-10 years! :-). Although, I suspect that I would make say 4.5% of 800 billion Euros within a month, or two ;-)
    19 Dec 2011, 04:16 AM Reply Like
  • Sounds great, go ahead and get an EU banking license then. And don't believe the big bankers in the EU who have stated in public writings that they have zero interest in purchasing EU sovereign debt at this point in time, as they have about 1 trillion of their own bank issued debt they have to worry about rolling & refinancing.


    No doubt the ECB will be very happy to have you bring several hundred billion of your own euros to set up your own new bank, and they will then be happy to loan you all kinds of cheap money to buy high risk EU sovereign debt. But we do wish you good luck with your bank license and future riches. And good luck with your EFSF guarantees when China, Brazil, and no other country will lend the EFSF any money so they have a mere few billion at this point to guarantee anything, and can't get anyone to lend them any more money with their latest attempt to raise even a few billion more a failed auction. Perhaps, instead of a bank license, you might want to lend to the EFSF, since nobody else seems to want to do so.
    19 Dec 2011, 05:27 AM Reply Like
  • when are these clowns going to stop the little dance and give up the charade.....they will print money, buy bonds, and set themselves on a course to reinflate and hopefully get their brains working to fix the real problem....socialism does not work.
    18 Dec 2011, 10:26 PM Reply Like
  • Great link to the Bruce Kasting commentary in the article. Which is why perma-bulls like Stone Fox Capital just might get slaughtered in 2012. SFC continues to paint rosy scenarios such as ECB must print and EU banks must buy EU sovereign debt and meltdown must be averted when the facts and comments by the real participants indicate they will not be taking such actions. It may well be that the real participants are eventually forced into such actions, but it also may well be that markets are at significantly lower levels before such action is forced on the ECB, EU banks, etc.
    18 Dec 2011, 10:32 PM Reply Like
  • They will have no choice will be the only way for a depression....a real bad one....can be isnt a great solution, just the only one right now.
    18 Dec 2011, 10:38 PM Reply Like
  • It isn't a solution at all. It is kicking the can temporarily. Each time the problem becomes bigger. We are near the end of this game. A painful reset is inbound and least when you expect it. Right now the market has $800 billion priced in for additional QE. When that doesn't materialize because it can't you will understand how foolish the calls for money printing are.
    18 Dec 2011, 10:50 PM Reply Like
  • You could be right, but i believe otherwise. The illusion/perception, always becomes reality. What other choice is there?
    18 Dec 2011, 11:17 PM Reply Like
  • RS,
    Well that may be true in the final analysis. But at this point, the facts and EU pronouncements indicate otherwise. And the more important question is where will the S&P be by the time they are forced to do so? Will it be back at Mar/09 S&P levels of 666 by then? And will perma-bulls like SFC have lost 50+% of their and their client's captial by that point in time?


    Those are the relevant questions at this stage. That is the decision that investors have to make now .... not in 3,6 or 12 months after potential significant market declines have happened and when the ECB may be forced to significantly intervene as the last ditch alternative, which they currently say they will not do.


    Is that how it will play out? Nobody knows for sure. But are you willing to take that gamble? Many are not, including us. To those who are, more power to them, and maybe they will be right. But it is a very big gamble.
    19 Dec 2011, 02:42 AM Reply Like
  • Margin requirements have nothing to do with the credit worthiness of the debtor
    18 Dec 2011, 11:13 PM Reply Like
  • My uninformed $.02 (ok, maybe only $.01). 3 primary data points: EU will have to print eventually (i.e. where else can the money come from to make the math work?). The Germans are entrenched against this. Sovereign budgets are out of control for Southern Europe.


    I think the endgame is that they will print eventually. The issue to me is more of "what do you get in return for doing so?". I would look for the fiscal integration to be done first and the budgets brought in-line to what is agreed upon. Then print.


    There is no advantage to fix the problem by printing now. The systemic changes for fiscal sustainability have not yet been put in place. I think it is a very smart game by the Germans. Use the bond markets as a hammer to drive the systemic changes that are needed FIRST. If you just print the problems away now, there is no driving force for southern Europe to change their behavior.


    Hence, the continued "extend and pretend". I think this goes on for as long as necessary to get whatever systemic changes the Germans are looking for. Since people do not accept change readily or easily; the "extend and pretend" could continue for much longer than anyone anticipates.
    21 Dec 2011, 01:17 PM Reply Like
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