ECB Has €444 Billion PIIGS Exposure, A 4.25% Drop In Asset Values Would Bankrupt European Central Bank

Tyler Durden's picture

As if insolvent European private banks were not enough to worry about (and with banking assets of 461 percent of GDP in the UK, 178 percent in Germany, and 820 percent in Switzerland, there is more than enough to worry about), a new study by Open Europe has found that at the heart of the insolvency argument is none other than the only hedge fund that is even worse capitalized than the US Federal Reserve: the European Central Bank. "With Greece forced to seek a second bail-out to avoid bankruptcy, Open Europe has today published a briefing cataloguing how the eurozone crisis could drive the European Central Bank itself into insolvency, with taxpayers likely to pick up a big chunk of the bill.  The role of the ECB in the ongoing eurozone and banking crisis has been significantly understated. By propping up struggling eurozone governments and providing cheap credit to ailing banks, the ECB has put billions worth of risky assets on its books. We estimate that the ECB has exposure to struggling eurozone economies (the so-called PIIGS) of around €444bn – an amount roughly equivalent to the GDP of Finland and Austria combined. Of this, around €190bn is exposure to the Greek state and Greek banks. Should the ECB see the value of its assets fall by just 4.25%, which is no longer a remote risk, its entire capital base would be wiped out." It seems that in crafting "prudent" capitalization ratios courtesy of Basel 1 through infinity, the global NWO regulators totally let the ECB slip through the cracks. The finding also confirms what we have been saying all along: there is no way that any form of voluntary or involuntary phase transition that will require the ECB to mark down assets that it has on its books at par (yet are worth 50 cents on the dollar) can ever occur: such an event would result in the immediate insolvency of the European lender of first and last resort, and, in turn, the unravelling of the Eurozone.

From Open Europe:

"The ECB’s attempts to paper over the cracks in the eurozone may have temporarily softened the impact of the crisis, but have exacerbated the situation in the long-term. The ECB has dug itself into a hole and now we are seeing that there is no easy way out.”

“Huge risks have been transferred from struggling governments and banks onto the ECB’s books, with taxpayers as the ultimate guarantor. There’s a real risk that these assets will face radical write-downs in future with eurozone governments and banks teetering on the edge of bankruptcy. This amounts to a hidden – and potentially huge – bill to taxpayers to save the euro.”

“The ECB’s wobbly finances and operations to finance states have landed a serious blow to its credibility. It must now seek to become the strong, independent bank that electorates were promised when the Single Currency was forged.”

Key points from the report:

- In parallel with the IMF’s and EU’s multi-billion euro interventions, the ECB has engaged in its own bail-out operation, providing cheap credit to insolvent banks and propping up struggling eurozone governments, despite this being against its own rules. The ECB is ultimately underwritten by taxpayers, which means that there is a hidden – and potentially huge – cost of the eurozone crisis to taxpayers buried in the ECB’s books.

- As a result, the ECB’s balance sheet is now looking increasingly vulnerable. We estimate that the ECB has exposure to struggling eurozone economies (the so-called PIIGS) of around €444bn – an amount roughly equivalent to the GDP of Finland and Austria combined. Although not all these assets and loans are ‘bad’, many of them could result in serious losses for the ECB should the eurozone crisis continue to deteriorate. Critically, struggling banks in insolvent countries have been allowed to shift risky assets away from their own balance sheets and onto the ECB’s (all the while receiving ECB loans in return). Many of these assets are extremely difficult to value.

- Overall, the ECB is now leveraged around 23 to 24 times, with only €82bn in capital and reserves. In contrast, the Swedish central bank is leveraged just under five times, while the average hedge fund is leveraged four to five times. This means that should the ECB see its assets fall by just 4.25% in value, from booking losses on its loans or purchases of government debt, its entire capital base would be wiped out.

- Hefty losses for the ECB are no longer a remote risk, with Greece likely to default within the next few years – even if it gets a fresh bail-out package from the EU and IMF – which would also bring down the country’s banks. We estimate that the ECB has taken on around €190bn in Greek assets by propping up the Greek state and banks. Should Greece restructure half of its debt – which is needed to bring down the country’s debt to sustainable levels – the ECB is set to face losses of between €44.5bn and €65.8bn on the government bonds it has purchased and the collateral it is holding from Greek banks. This is equal to between 2.35% and 3.47% of assets, meaning it comes close to wiping out the ECB’s capital base.

- A loss of this magnitude would effectively leave the ECB insolvent and in need of recapitalisation. It would then have to either start printing money to cover the losses or ask eurozone governments to send it more cash (via a capital call to national central banks).  The first option would lead to inflation, which is unacceptable in Germany, while the second option amounts to another fully fledged bail-out, with taxpayers facing upfront costs (rather than loan guarantees as in the government eurozone bail-outs). 

- The ECB’s actions during the financial crisis have not only weighed heavily on its balance sheet, but also its credibility. First, as a paper published by the ECB last year noted, “The perceptions of a central bank’s financial strength have an impact on the credibility of the central bank and its policy”.  Secondly, by financing states, the ECB has effectively engaged in fiscal policy – and therefore politics – something which electorates were told would never happen.

- Worried about the risk of these potential losses being realised, the ECB is vehemently opposed to debt restructuring for Greece and other weaker economies. However, continuing the ECB’s existing policy of propping up insolvent banks – and intermittently governments – would be even worse for the eurozone as a whole.

- The ECB’s cheap credit has served as a disincentive to struggling banks to recapitalise and limit their exposure to toxic assets in weak eurozone economies. This creates moral hazard for banks and governments alike, at times even fuelling the sovereign debt crisis, while transferring more of the ultimate risk to taxpayers across Europe. Therefore, in its attempt to soften the immediate impact of the financial crisis, the ECB may in fact have exacerbated the situation in the long-term, increasing the cost of keeping the eurozone together for taxpayers and governments.

- Moving forward, the ECB must return to its original mission of promoting price stability and a way has to be found to get ailing banks off the ECB’s life support. This should include a winding-down mechanism for insolvent banks.

Full report below:

ECB Open Europe

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qussl3's picture

Frankly the easiest way to bail out the banking system is to have the PIIGS default, declare the ECB insolvent then do a EU wide one time recapitalization levy.

If they want to go for MAD, go all the way.

Crisismode's picture

If the PIIGS default, then they take all of Europe, and then all of the rest of the western industrial world with them.

It's not as tidy as just letting a couple small governments renounce their debts . . . the entire world financial system is so interlocked that once the first dominoes fall, the rest soon fall afterward.

Dr. No's picture

Hank Paulson, is that you?

Ahmeexnal's picture

ETARP (European Troubled Asset Relief Program) to be announced, by rETARD Trichet.

qussl3's picture

Well the tidiest it will get is if the ECB takes all PIIGS "assets" off the banks at par, raise reserve requirements so the "good" money doesnt go nuts in velocity and then have the PIGGGS declare a simultaneous default. After that just do a 15% EU wide income/wealth levy to recapitalize the ECB.

Problem is the bankers who have the heads up on this will be stashing all their cash in CHF, ......... wait..

Lieutenant Dan's picture

The EU will never mark to market their assets. We are doing the same thing in the United States. Thats what keeps us "solvent". If the Brics establish well developed sustainable economies that don't depend on the ponzi countries, they will be able to tell the Eu and the US that the joke is over.

three chord sloth's picture

Yep. And that doesn't even take the whole derivatives scam into account. What would all this do to the 10x World GDP Sword-of-Damacles CDS market?

Reptil's picture

Yes, and when a system becomes unmanagable for the purpose it was set up, and even becomes a disruptive force, there's only one way to solve this issue in a capitalist system, and that is to abandon it and let it die.

Just the day before yesterday in a discussion an angry and frightened person threw the following question at my feet:

"so then, where do you keep your money!? how can you argue this point, when you yourself are at risk?"

StychoKiller's picture

Answer is easy:  PMs, Pb & high-speed delivery devices, beans, booze, anything with a store of value -- cause FRNs sure ain't!

Re-Discovery's picture

EURO printing will begin in earnest UNLESS unrest moves to Germany.

Urban Redneck's picture

It interestingthat the Eurozone is still waiting on Trichet & Juncker to pull a repeat of the Paulson & Bernanke 2008 extortion performance.  Meanwhile, Greece skipped the IOUs and has erupted in riots and they don't even have California's $500B in outstanding state & municipal debt. 

dcb's picture




Cash_is_Trash's picture

Nationalization of lossezz

speedy's picture


woud you mind not shouting please?  My ears hurt!

writingsonthewall's picture

Going down, going down, going down.....

I wonder when the ECB will admit there is a problem? - perhaps after the major banks disappear and the 'contagion' takes the world back into recession.

Is this some sort of revenge on America? - you seel us crap, our banks will bankrupt your banks and we'll all go down the tubes together.

I never thought economic armageddon would be so much fun - one minute it's the US, then it's the EU, then it's everyone else, then back to the US etc....

What's the shorting on banks these days? - surely everyone knows that EU banks are finished - it's just a matter of when...

Id fight Gandhi's picture

It's like ping pong. Probably eating to be shorting time.

Josephine29's picture

The problems of the European Central Bank just go on and on. It has perhaps the lowest quality collateral on its books of any mid/major sized central bank. Ironically as the Notayesmanseconomics blog points out it was boasting about this only 2 years ago. From a speech by Mr.Trichet to Munich university.

The second building block of our new liquidity management approach is the list of assets that we take as collateral. This list was already very long before the crisis. We have enlarged it further and now accept an even wider range of securities as collateral. Government securities account for less than half of the nominal value of the securities on the list. The rest are private securities. By contrast with many other central banks, the ECB already accepted private paper before the crisis. In this sense, we were fairly well prepared for the crisis, as we had a relatively “modern” collateral framework. As a consequence, the total value of these eligible securities is currently €12.2 trillion, equivalent to 130% of the GDP of the euro area. This very broad range of eligible collateral has considerably eased banks’ liquidity constraints during the crisis.

Mindful Money


I guess many others will now be asking the question of what this “modern” collateral framework means in terms of losses as values in places like Greece have collapsed...

A Man without Qualities's picture

"It has perhaps the lowest quality collateral on its books of any mid/major sized central bank."

Everyone seems happy to forget what the Fed bought in the first round of QE.... never mind Maiden Lanes...

SWRichmond's picture

Obviously, the world needs another, new level of financial obfuscation, capital-from-nowhere, to bail everyone out.  SDR!

Crisismode's picture

But it's not real money anyway . . . .

 . . . just a bunch of 0's and 1's on a few hard drives.

Wipe the drive, reinstall the OS, and create a bunch of new 0's and 1's

oogs66's picture

The ECB has become a huge roadblock to solving any problem.  So many of their holdings had nothing to do with the daily functioning of the economies.  Trichet embarked on a program of secondary market purchases which are killing the ECB and the governments that fund it!

kaiten's picture

How could a central bank go bankrupt? They´ll just print few more trillions. Problem "solved".

Sean7k's picture

During the Weimar hyperinflation, the only thing that mattered to the German people was one: constant adjustment of wages and two, printing enough money to pay it. 

No one questioned if this caused inflation, they blamed it on other outside influences and the people went along.

We often act as if people are rational. However, when the wolves howl and pace, the herd moves together and panics. Something cowboys use to lead them to their eventual slaughter- that mindless run into the gaping jaws of death.

Academics have the job of recording the history of these roundups- the official version to be taught each new generational herd and the harder to find "alternative" versions which could save their lives. 

swissinv's picture

On thing to consider is that the 820% of Swiss GDP number mainly results from UBS giant where 80% of operation lies in the US. While a bankruptcy of the biggest bank would be certainly catastrophic for the Swiss, I doubt that the gov. has any incentive nor the money to bail it out. 

buzzsaw99's picture

the bernank guarantees all usa and euro banks.

Greeny's picture

What EUR doing at $1.46? Should be 1:1 at least.

Look at that CHF, insane valuation. USD used buy 4 Swiss

Franks in 70's

topcallingtroll's picture

This is great for the dollar!

We can rebalance and recover at european expense.

Reptil's picture

Yes. And that's the plan. Like a tag team off a cliff...

godzila's picture

As far as I am concerned the ECB can and will print Euros at will - not a good idea but it will never be "bankrupt"

topcallingtroll's picture

Yeah....double entry bookkeeping for a central bank is just a figleaf. Public doesnt understand or care. Just print. You have no respect or credibility anyway.

earnulf's picture

ECB has about 1.895 Trillion Euro's on it's books, 23% of it is PIIGS, much is just plain crap that was loaded on during the "easy" phase of accepting everyone's belly lint as gold thread.

I think it's time to MAD everything and let it all shake out.   At least then we can get back to something solid instead of all this fiat.

THE DORK OF CORK's picture

They have a shit load of Gold on their balance sheet or at least they claim they have - CBs cannot go bankrupt with such a asset.

qussl3's picture

China will be very very very unhappy if they go that route.

Not to mention the Ruskies.

PaperBear's picture

ATLANTA—Treasury Secretary Timothy Geithner called for global standards in the way derivatives contracts are structured in order to prevent a global "race to the bottom."

Is this guy having a laugh or what ?

He is a former Wall Street banker and these banks lobbied long and hard to keep derivatives unregulated.

AIG's bailout of $180BN saw $13BN go to Goldman Sachs for their CDS on the mortgage S**T they sold investors.

EscapeKey's picture

Oh, don't worry. PD's are considered to do an excellent job self-regulating, and hence will receive waivers. The standards will only apply to everyone else, raising the cost of competition.

equity_momo's picture

I've still got some Track and Field awards in the attic from the 80s, i wonder if i can pledge them as collateral. Few hundred vinyl LPs too , thats got to be worth a medium sized housing development to the ECB.

anvILL's picture

Should the ECB see the value of its assets fall by just 4.25%, which is no longer a remote risk, its entire capital base would be wiped out.

Wonderful. It is significantly less levered than the FRB.

poydras's picture

The ECB is most likely already insolvent on a true mark to market basis.  The objective of Extend & Pretend is pretending that the subject entity is solvent.

This problem would not exist if banks operated on a Reg T type leverage (e.g 2:1).  This 12+:1 coupled with horrible underwriting is a clear recipe for insolvency.

Remarkable!  The recipe is a success!

EscapeKey's picture

ALL major banks are insolvent on a true mark to market basis, not just the ECB.

Zero Debt's picture

ECB leverage of 23-24x is approaching Lehman Brothers leverage of 30x in the end of 2007. And we all know how that went.


EscapeKey's picture

Lehman couldn't print money, however. How do you think this crisis will ultimately be "solved"?

Zero Debt's picture

Most likely the endgame is the failure of the European central bank.

ECB has 82 billion Euro in capital and reserves. In this article the scenario painted out is that Greece restructures half of its debt forces losses of 44-66bn eur. This is 53%-80% of the entire capital base. Recall back in end of 2010 that ECB boosted the capital base because they were worried about sovereign bond losses. This is why. At that time, they got the cash (5 bn eur) from 16 national central banks. The crux this time is that Greece is indirectly also linked to these other national central bank's ability to meet a margin call from the ECB. As monetizing these debts would wipe out the confidence in the system, there would be severe political pressure for central banks to help the ECB. Now consider the study done by Reggie Middleton. He claims that in order to restructure the debt to be in compliance with the Maastricht Treaty, Germany would lose 23% of Tier 1 capital of their domiciled banks. Rates in the Eurozone in general would face severe upward pressure to attract deposits to cover the shortfall, of course, as is happening in Hong Kong right now despite lots of "liquidity" in the system. Thus the national states will not be able to have the cookie and eat it, e.g. save both the ECB and their own national banks as the national banks are squeezed between recapitalizing ECB and recapitalizing their own banks. As the savers holding the pitchforks are more likely concerned with their savings in Germany, the choice is obvious. Recall also that Dagong rates Greece sovereign credit as CCC, Standard and Poor rates it B so restructuring is pretty much a fact, the rest is more or less a matter of formalities.

Now an alternative way for the ponzi to buy time would be that the US Fed extends temporary swap lines to the ECB. The initial swap lines were 20bn USD in 2010 which is approx 13.7 bn EUR. However this would fall way way short of the credit losses of PIIGS ggiven how levered ECB now is as they don't want to be doing monetization. Again, from the article, the exposure to PIIGS is 444 bn EUR. The Fed swap line of 13.7 bn eur would supposedly be a temporary measure. But such hope is premature, many economists do not believe Greece would grow its economy until 2013 or 2014. Same story for Spain and most other post-bubble economies. The purpose of the swap lines are overnight and short-term funding only. That can hardly be stretched 2-3 years ahead. And while the Fed could provide discount window funding to European banks, thus easing pressure on the national ones, it would hardly be feasible over a multi-year period. All Fed swap lines are scheduled for shutdown in less than 2 months, August 1, 2011. With the end of QE2 that is a double whammy from the Fed, one for the US treasury, one for the various other central banks.

All of the above, after all, are just temporary measures and various forms of central planner musical chairs and money printing. Hedge accordingly.

Zero Debt's picture

And it gets worse...

German banks according to DIW have 7,600 bn euro in assets, three times Germany's BNP, but only 350 bn in capital. The leverage ratio of the entire German banking system is thus 21.7x, not much different from ECB. So beggar-thy-neighbor wouldn't work, because Germany is in no better shape than the ECB. AND....among their assets are 230 bn euro exposed to the PIIGS. Which means.. PIIGS can wipe out 65% of the capital of the entire German banking system, perhaps in a matter of days or weeks, or equivalently leverage these banks to 7600/120 = 63x. And this figure is an aggregate because no doubt certain institutions may be even more seriously exposed.

On top of this..any rational saver would not really prefer their saving to be leveraged 21 times by the bank meaning that your hardly earned euro has beeen lent out 20 times over, not even mentioning 63 times over to a less stellar concoction of debtors. AND...did anyone say BASEL II. Under basel 1, sovereign debt was risk weighted 0%. Hello yeah that Greece is a 0% risk asset. With 8% capital the maximum leverage is 12.5x. Plus, a higher risk weighting on subpar sovereign debt changes weightings. Conservatively this requires the current leverage in the entire German banking system, the largest economy in Europe, to be cut by half by say 2015. So what does that mean for rates. Etc.

Tom_333's picture

Don´t worry. ECB will just lend a leaf out of the Fed playbook and  print...print...print...and print some more.And you know - it works!

desgust's picture

wonderfull contribution!

Thank you.

Yes, let us see the European bankstas and the socialst sheeple go to hell!

fockewulf190's picture

One nasty black swan event is all it is going to take to push the eu back into the dark ages.

scratch_and_sniff's picture

It's like sticking my head in a spin-dryer. So the possible solutions; Get a bail out(from china? or EZ) Slow down cheap money to bad banks and tell them to stay away from peripheral debt(How long do these banks need propping up, it cant be much longer until we find out the final costs), print money…I can smell the Heidelberg GTO’s purring as we speak. I couldnt see the ECB getting its knickers in a twist with that many can-kicking options on the table.