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Banks Responsible For Sudden European Liquidity Crunch Identified

Tyler Durden's picture





 

There goes another "fat finger" red herring. On Thursday and Friday, when we noted that borrowing under the ECB's Marginal Lending Facility has spiked from roughly €1 billion to €16 billion for two days in a row, we mocked the MSM explanation that this was merely the result of a fat finger, or at worst a faulty recalendarization of a term-MRO borrowing activity for an overnight one (at the exponentially higher rate of 1.75%). As expected, and as we predicted, this was indeed a case of bank gone wrong. Or two. The FT reports that "Anglo Irish Bank and the Irish Nationwide Building Society, Ireland’s two most troubled lenders, were behind a spike in overnight borrowings this week from the European Central Bank, according to people familiar with the transactions." And while we now know who the guilty parties are, the explanation once again leave much to be desired. It is no surprise that all European banks are exclusively reliant on the ECB for funding, which as previously indicated confirms that the Euribor market is a relic of the past since nobody approaches other banks for capital - everyone goes straight to uncle Jean Claude... And in doing so pledges any and all collateral, even if it means running an outright ponzi scheme. "Both
banks have become heavily reliant on the ECB’s liquidity funding over
the past 2 years, as they have been unable to roll over maturing bond
debt and have seen an outflow of deposits." Yet instead of acknowledging that this action is merely a liquidity crunch, the FT's explanation is that the surge in borrowing has to do with the ability to unwind collateral on a moment's notice as a function of the banks' restructuring, instead of having it locked up for a week under the MRO. We are not sure if this "explanation" is just as, or more, laughable than the fat finger one.

From the FT:

A senior figure familiar with the transaction said it was “to facilitate” the sale of deposits by Anglo Irish and Irish Nationwide under the restructuring plan. Under the ECB’s normal refinancing operations, the collateral is locked up for a week. Tapping the ECB’s overnight or “marginal lending” facility, although more expensive “gives the banks the freedom to have the assets at their disposal immediately if there is a quick sale,” he said.

Earlier this month, Anglo Irish said its borrowings from the ECB and from the Irish Central Bank – under the emergency liquidity assistance programme which applies slightly less onerous collateral eligibility rules – doubled to €45bn in 2010.

However the assets used as collateral by both institutions to be able to borrow from the ECB are now being hived off as part of the lenders’ restructuring.

The main collateral pledged with the ECB to borrow is the government backed bonds issued as consideration for the impaired property loans that are being bought by the National Asset Management Agency, the government’s bad bank loan agency.

What is amusing is that while the logic works in theory, in practice it doesn't. Yesterday we said that "As European collateral has no quality thresholds, and as the ECB will
accept anything, it makes no sense for any bank to pay incremental
interest just to transfer borrowing to an overnight facility with a
punitive rate - simple as that.
" The proposed explanation by the FT's "sources" is the only logical one under these parameters. Yet the trade off of a surge in interest in exchange for collateral flexibility makes little to no sense. First of all, NAMA is not supposed to start auctioning off deposits and other assets of the two failed banks for at least several more weeks, which does not justify paying the much higher overnight rate just to have the facility of not having a holding term locked in. Secondly, it is very naive to assume that the ECB would not release collateral even under a term facility at the moment's notice if the underlying bank requested it. After all, the ECB is more concerned with bank contagion (i.e., the truth coming out) than anything.

Yet the good news is that now this deterioration is fully priced in and the levitation ramp may continue. And not just through Tuesday as Citi's Jurgen Michels expected. It may well go on for weeks until the supposed liquidation of collateral is consummated. What will be enjoyable to watch is just how much more MLF lending surges by in the same period, and how many other banks claim the same straw man excuse.

Traders say the two lenders are expected to continue to rely on overnight borrowing for a couple of weeks as final plans are made to sell the Nama bonds as part of the wind down plan.

Our prediction is to keep an eye out on the parallel shift between various term ECB tender operations. If indeed there is a scramble in broader Europe for freeing up collateral on a moment's notice, which reading between the lines of the FT's article implies, more and more banks will shift their holdings from LTRO facilities (28, 91 and 98 day) , to 7 Day MROs and finally to the overnight 1.75% Marginal Lending Facility. All of a sudden the European treasury curve for many continental institutions may get a whole lot flatter...

 


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Sat, 02/19/2011 - 13:38 | Link to Comment Vampyroteuthis ...
Vampyroteuthis infernalis's picture

How long can they continue pretending they are not insolvent? This is now a farce!

Sat, 02/19/2011 - 13:50 | Link to Comment AN0NYM0US
AN0NYM0US's picture
Wake up, Americans. Your economic dream is a nightmare

JEFFREY SIMPSON |
From Saturday February 19, 2011  Globe and Mail

"Barack Obama is complicit with Republicans in deforming the nature of the debate and ill-informing the people"

Sat, 02/19/2011 - 13:55 | Link to Comment EscapeKey
EscapeKey's picture

That's funny. I would use the exact same quote to ask people to wake up and realize that Repubs, Democrats, it's all the same thing. There. is. no. difference.

The Republicans just passed their "austere" budget through the house. $60bn savings (out of $3.7tn spending), with no cuts to Medicare/aid, Defense or other Mandatory spending. Yeah, wow, that'll totally fix the problem.

Sat, 02/19/2011 - 14:10 | Link to Comment dick cheneys ghost
dick cheneys ghost's picture

exactly right, read this about nascar and the military and tell me who is in charge.

 

http://nakedempire.wordpress.com/

Sun, 02/20/2011 - 14:27 | Link to Comment DosZap
DosZap's picture

EK,

They can cut wherever they need to except SS/MC.

The Gvt stealing Funds paid out of my & your paychecks over the course of your lifetime, is a flat out No.

Give me a list of Gvt agencies, and monies donated yearly to each one, and I will cut this SOB to ribbons.

The problem is in D.C.,we have a 10sq mile of 9yr olds running the house.

Sat, 02/19/2011 - 14:04 | Link to Comment topcallingtroll
topcallingtroll's picture

Good article. However it can work if the rest of the world continues to peg to.constantly devaluing dollars and.they willingly give us all their surplus. Plus if the euro has more trouble it will buy us time.

Sat, 02/19/2011 - 14:07 | Link to Comment EscapeKey
EscapeKey's picture

and.they willingly give us all their surplus

that sounds like a sustainable solution.

Sat, 02/19/2011 - 14:11 | Link to Comment topcallingtroll
topcallingtroll's picture

They have been playing along so far, most of them anyway. They fear recession even more than we do.

Sat, 02/19/2011 - 14:17 | Link to Comment EscapeKey
EscapeKey's picture

No, they haven't. The Chinese/Japanese no longer sponsor US debt. Uncle Ben monetizes practically 100%. Well, except for the $350bn the UK supposedly bought over the past yeah *cough!* bullshit *cough!*

China have taken the opportunity to stock up on commodities, and purchase European pheriphery debt, no doubt because they want to grow their influence in the Eurozone.

http://www.ustreas.gov/tic/mfh.txt

Sat, 02/19/2011 - 14:23 | Link to Comment Dick Darlington
Dick Darlington's picture

By looking at the post mortems of spanish and portuguese auctions one can find that the share of bonds allocated to group called "Asia" is very tiny. Feels like it's more talk and less walk at least when it comes to participating in the auctions.

Sat, 02/19/2011 - 14:35 | Link to Comment EscapeKey
EscapeKey's picture

They might not have been bidding at auctions, but there's no stopping them from buying bonds off other financial entities.

Sat, 02/19/2011 - 13:40 | Link to Comment cswjr
cswjr's picture

So hard to maintain a facade, these days, with pesky blogosphere types poking around.  I'm sure it was much easier for J.P. Morgan (the individual).

Sat, 02/19/2011 - 13:57 | Link to Comment snowball777
snowball777's picture

Muckrakers?

 

Sat, 02/19/2011 - 13:58 | Link to Comment EscapeKey
EscapeKey's picture

John D. Rockefeller; "Competition is a sin". And his great-grandson wants to shut down the internet. Yep, the internet is a pain in the ass for the elite.

Sat, 02/19/2011 - 13:46 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Anglo and Irish nationwide are no longer real utility banks - anyone with deposits still in them is clearly not  a rational human being , if the deposits are gone then the remaining bonds are fair game.

Sat, 02/19/2011 - 13:52 | Link to Comment topcallingtroll
topcallingtroll's picture

The ecb can always create new money to pay off depositors. The clownbux are safe. The ultimate value is the only thing in question.

Sat, 02/19/2011 - 13:57 | Link to Comment Phineas Gage
Phineas Gage's picture

DoC, are you getting any sense of the way the upcoming Irish vote will go?  Thanks.

Sat, 02/19/2011 - 14:36 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

It looks like FG with a minority party  - FG big plan is to sell state non strategic assets - they do not consider power stations as strategic assets somehow - I am not sure the Luftwaffe would agree with them.

The same ding dong happened during the Great War - most of the populace voted for the conservative home rule parties who advocated one more push for partial independence - the voters only became radical when the fathers , sons and sovereigns did not come home.

Sat, 02/19/2011 - 13:47 | Link to Comment Bill D. Cat
Bill D. Cat's picture

Must be bonus season .

Sat, 02/19/2011 - 13:55 | Link to Comment Phineas Gage
Phineas Gage's picture

Is there a relationship between this and the upcoming vote in Ireland (I believe the 25th), which could derail things?

 

Sat, 02/19/2011 - 13:57 | Link to Comment Tyler Durden
Tyler Durden's picture

Yes.

Sat, 02/19/2011 - 14:09 | Link to Comment topcallingtroll
topcallingtroll's picture

Interesting hypothesis. Probably worth an article as to the probable vote aftermath.

Sat, 02/19/2011 - 14:50 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

How do the latest polls look?

Sat, 02/19/2011 - 14:51 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Tyler expect some meat on the table but not much - FG for the most part are creatures with just a different background then FF.

But this is why Anglo and Nationwide are so vulnerable - the Irish for the most part blame them for the mess - as I said from a poltical standpoint they are fair game.

The fact that most of the bondholders have escaped via the ECB rollover prevention programme is making depositors very suspicious of the ECBs priorities.

Irish banks can exchange and create their own electronic liabilties all they want but if these liabilties become cash it is most surely the ECBs problem.

 

Sat, 02/19/2011 - 13:58 | Link to Comment Byte Me
Byte Me's picture

Michael Fitzpatrick and Patrick Fitzmichael.

Always knew the paddy banking system was a bit bent.

Sat, 02/19/2011 - 14:03 | Link to Comment Dick Darlington
Dick Darlington's picture

Funny thing with the euribor is that while it is indeed a relic of the past like Tyler mentioned, for the households who still want to join the debt band wagon and buy their "own" over priced house just before the wheels come off, euribor is live and kicking. For example in Spain and Finland most of the mortgages are tied to euribor with ridiculously low margins. And just by looking at the artificial levels of any euribor rate (1-12 months) one can see why house prices get inflated so much so fast. It happened in Spain with well known consequences (even though spanish banks do everything to hide the rotten loans in their books) and it's now happening in Finland. Add some loose lending standards (no or little equity) to the soup and wait for euribors to eventually take off and we just might have a couple of more banks wondering how their mortgage books start to rotten. No wonder the european banks are issuing covered bonds like there's no tomorrow. After all, those usually have AAA rating from all the irrelevant rating agencies.

Sat, 02/19/2011 - 14:17 | Link to Comment topcallingtroll
topcallingtroll's picture

In spain I read you cannot get out of a mortgage wirh bankruptcy. This will be interesting. I have seen the crappiest houses go for 300,000 euro with no central heat or air. Very primitive small 19th century style farmhouses. This cannot continue

Sat, 02/19/2011 - 14:27 | Link to Comment Dick Darlington
Dick Darlington's picture

It's the same in both Spain and Finland. There's no walk away option in mortgages. It'll haunt You to the bitter end.

Sat, 02/19/2011 - 14:41 | Link to Comment Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Ditto Ireland.

Sat, 02/19/2011 - 15:17 | Link to Comment savagegoose
savagegoose's picture

well no walk away but there is bankrputcy. sure you go into a no loans for several years regime, but if you're broke you're broke.  debt wont follow you till grave or anything.

Sat, 02/19/2011 - 15:33 | Link to Comment Dick Darlington
Dick Darlington's picture

Yes it will. After selling the house You owe the balance between the selling price and the remaining debt. Authorities will monitor you and if you have any income they will take part of it every month to cover the remaining balance You owe. In Finland there was a crash in house prices in early 90's and many people got burned. Many was forced to work underground so that it seems as You don't have any income. Some got forgiven the remaining debt they owed after 15 years.

Sat, 02/19/2011 - 16:35 | Link to Comment Hollow_Point
Hollow_Point's picture

"Mortgage" translation .... Latin --> English.....Mort-Gage --> Death Grip

Sat, 02/19/2011 - 14:17 | Link to Comment Misean
Misean's picture

Why would Irish banks do this. The government has the keys to the printing press, and should that fail, they can just loan the money to themselves. How bad do things have to be when those two options fail?

Sat, 02/19/2011 - 14:24 | Link to Comment gwar5
gwar5's picture

Here's a little ditty. The Treasury issued gold certificates to the Federal Reserve. Comes from recent GATA reveal from their disclosure lawsuit re: manipulation of gold. So whose gold is it?

U.S. delegate Fisher, the minutes say, "explained that U.S. gold belongs to the Treasury. However, the Treasury had issued gold certificates to the Reserve Banks, and so gold (by these means) also appears on the Federal Reserve balance sheet. If there were to be a revaluation of gold, the certificates would also be revalued upwards; however [to prevent the Fed's balance sheet from expanding] this would lead to sales of government securities. So the net benefit to Treasury would need to be carefully calculated, since sales of government securities would expand the public portfolio of government securities and hence also expand the Treasury's debt-servicing burden."

.

Sat, 02/19/2011 - 14:38 | Link to Comment EscapeKey
EscapeKey's picture

So am I to understand this as:

gold revaluation => sales of gov't securities => higher total interest payments.

In other words, by manipulating the price of gold down, the sales don't take place, and the FRB hands over the "interest earned" back to the Treasury.

Sat, 02/19/2011 - 14:42 | Link to Comment gwar5
gwar5's picture

Here's a little ditty. The Treasury issued gold certificates to the Federal Reserve. Comes from recent GATA reveal re: their disclosure lawsuit against the Fed and manipulation of gold. So whose gold is it under FRBNY?

U.S. delegate Fisher, the minutes say, "explained that U.S. gold belongs to the Treasury. However, the Treasury had issued gold certificates to the Reserve Banks, and so gold (by these means) also appears on the Federal Reserve balance sheet. If there were to be a revaluation of gold, the certificates would also be revalued upwards; however [to prevent the Fed's balance sheet from expanding] this would lead to sales of government securities. So the net benefit to Treasury would need to be carefully calculated, since sales of government securities would expand the public portfolio of government securities and hence also expand the Treasury's debt-servicing burden."

G-10 minutes from 1997 show central bankers conspiring about gold | Gold Anti-Trust Action Committee

It looks to me like Treasury has used US taxpayer gold as collateral to the Fed. Hence the need for Gov.com to suppress the price of gold.  Am I understanding this correctly?

 

Sat, 02/19/2011 - 14:56 | Link to Comment EscapeKey
EscapeKey's picture

From what I understand:

FRB: (gov't securities) + (value of gold) = (static).

If the value of gold increases, the FRB must sell government securities.

Since these security interest payments go back to the Treasury, if held by the FRB, this will no longer be the case if they're sold to the investing public, and hence the deficit will increase, and the Dollar drop. (+ as Misean points out, selling the bonds will make yields increase).

That's my understanding, someone might be able to correct me.

Sat, 02/19/2011 - 15:17 | Link to Comment gwar5
gwar5's picture

I'm really confused by it too.

But it struck me that our gold seems to be put up as collateral to the Fed for their fiat. And the Fed seems to win no matter if gold goes up or down. But the state either keeps the price of gold down and the Fed fiat viable, or debt becomes unmanageable and the State loses gold to the Fed? Is that it?

If that's the case, little wonder the police state is pressed into service to suppress/prohibit gold and keep the fiat viable.  

 

Sat, 02/19/2011 - 14:55 | Link to Comment Misean
Misean's picture

If gold revalued up

then Feral Reserve balance sheet expands

  If Feral Reserve wants to NOT increase balance sheet

      1. Give gold back????

      2. Sell Treasuries.

           Sell treasuries raises interests rates.

                If treasury is issuing new debt or continuously rolling old debt then eventually increasing interests rates "cost" the

                the treasury.

As you can see, there's several conclusions in those statements that require certain unmentioned things to be true in order for the statement to be true.

Sat, 02/19/2011 - 15:23 | Link to Comment gwar5
gwar5's picture

.

Sat, 02/19/2011 - 15:22 | Link to Comment gwar5
gwar5's picture

Exactly. There's a little economic jujitsu going on there.Obfuscation works everytime. Worked on me.

We need to get the gold away from the Fed. Give them UST bonds and other worthless paper instead.

Get the gold certificates back. I'll take those.

Sun, 02/20/2011 - 01:20 | Link to Comment Attitude_Check
Attitude_Check's picture

So why not mark UP the Gold to market, and and the MBS and other "assets" DOWN to market.  That would minimize the need for asset sales!

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