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ECB Will Accept Junk-Rated Greekman Brothers Debt As Collateral In Suspenion To Rating Threshold Program
Did the ECB just learn the last bastion of rating agency insanity, aka Moody's, is about to downgrade Greece? Today Trichet decided to abandon all caution, and has proceeded to officially recognize all Greek toxic garbage as collateral for ECB-backed loans. Looks like the ECB president has been paying careful attention during Bernanke 101 in which his transatlantic colleague has been advocating the collateralization of a sovereign currency with all sorts of gamma decaying substances, for well over a year now. Now Ben is starting to get woefully behind the curve in the devaluation race. In the meantime, using simple math, we wonder: if Greece, which as so many have pointed out is only 2.7% of European GDP, ended up costing 110 billion euros, does that mean that a full blown bailout of Europe will be over $5 trillion? Surely this is a bargain compared to the $20+ trillion that the rescue of the US ended up costing. Looks like a slam dunk relative default pair trade to us.
The European Central Bank said it will accept all Greek government debt as collateral when lending to banks, indefinitely suspending minimum credit-rating thresholds to support a 110 billion-euro ($145 billion) bailout of the debt-strapped nation.
The decision came after Greece reached agreement yesterday on the conditions for the three-year package of loans from the International Monetary Fund and its euro-region allies. Under the plan backed by the ECB, Greece pledged another 30 billion euros in budget cuts to bring a deficit of 13.6 percent of gross domestic product back within the EU limit of 3 percent in 2014.
“The ECB is a key player in the rescue package designed to help Greece and it is clearly buying insurance against the likelihood of further multiple downgrades of the Greek debt, something that might lead to a halt of ECB financing to the Greek banks,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.
Now finally Moody's corrupt analysts can go ahead and downgrade Greece without any concerns that doing what is right will end up popping the ponzi, something they have sworn not to do when they signed their ethics waiver.
Greekman Brothers, a euphemism for Greece that has taken trading desks by storm due to the country's amazing comparability to another ill-fated organization, now also has full implicit support of its entire banking sector.
The ECB decision “removes the risk of a liquidity crisis
in the euro zone due to rating downgrades, said Luca Mezzomo,
head of macroeconomic fixed-income research at Intesa Sanpaolo
SpA in Milan. “Greek banks refinance about 12 percent of their
assets at the ECB, a situation that in the future will have to
be corrected, but certainly not during the implementation of an
emergency plan of support.”
In the meantime, Goldman's Francesco Garzarelli, director of macro and markets research, has released the company's latest trading axe: Goldman is now buying bunds, and telling its sophistiated clients to sell them. Goldman salespeople riot as they realize they will alienate whatever few names they have remaining in their rolodex when this most recent Goldman-sponsored trade blows up in everyone's faces. We recreate his latest note:
As announced this evening, Euro area finance ministers have pledged a cumulative EUR 80bn towards a 3-yr financial aid package for Greece through bi-lateral loans managed by the European Commission. The plan is co-funded with the IMF, which will contribute up to an additional EUR 30bn.
Earlier in the day, the Greek government outlined a new package of fiscal measures required to satisfy the conditions of access to the loans. The package assumes that Greece will be able to return to the market ahead of the three-year plan’s completion, possibly already in the second half of 2011, when a more virtuous fiscal track record will presumably have been established.
Around 40-45% of the funds will be available in the first year, with the first tranche disbursed ahead of the 19 May redemption of around EUR 8bn of Greek bonds. Fiscal progress will be reviewed quarterly. The cost of funds had already been announced on 11 April. Specifically, up to 3-yrs, loans will be priced at Euribor fixed swaps +300bp. Based on current market levels, Greece will be able to fund at the 2-yr maturity at around 4.5%. Above 3-yrs, the cost of funds goes up to Euribor fixed swaps +400bp, implying a 5-yr cost of borrowing of around 6.5% (an additional one-off 50bp ‘handling-fee’ is charged). IMF money is substantially cheaper.
Erik Nielsen has written on Greece’s updated fiscal adjustment plan and the conditional assistance in a previous note. Below are some initial thoughts on the likely market reaction in coming days. Our conclusion is that Greek benchmark bond spreads to Germany may in the near term come in by a further 200-250bp at the 2-yr maturity to around 9-10% and by 50-75bp in 10-yr space, to around 5.5%. Further more sustained spread compression is heavily contingent on the Greek fiscal performance, which will be unknown for several more months. The news today is marginally positive for the EUR, marginally bearish for Bunds, and positive for sovereign spreads in Ireland, Italy, Spain and Portugal, in descending order.
We would make the following observations.
1. This is the first conditional mutual assistance program for the relatively young European Monetary Union, where the principle of ‘no fiscal co–responsibility’ is enshrined the Maastricht Treaty (art.125). The scheme introduced following the Greek debt crisis will set a reference for future reforms of the European institutions. Some shades of ‘risk sharing’ and the additional funding requirement should gradually unwind the ’safe haven’ premium in German Bunds (we have recommended positioning for a compression in the 10-yr UST-Bund spread to the 40-50bp area, reflecting also our view that Treasuries will outperform their European counterparts). To the extent contagion risk has affected peripheral sovereign spreads in recent weeks, this should slowly reverse.
2. For the larger lending countries involved (Germany accounts for around 28% of the overall EMU funding, France 21%, Italy 18%, Spain 12% and the Netherlands 6%), the cost of funding the loans is around 300-400bp lower than the rate charged to Greece. The share of the full contingent commitment of the 5 largest lenders represents roughly 1% of the respective GDPs, and adds around 1.0-1.5% to their gross public debt. For all lenders involved, this operation represents a ‘positive carry’ financial transaction which will not materially affect their budgetary position. In spite of wider spreads, nominal marginal funding costs for the likes of Italy and Spain remain close to the lowest level in the history of these countries.
3. As to Greek sovereign spreads to Germany, which closed on Friday at 11.5-12% in the 2-yr sector and around 6% at the 10-yr maturity, the total amount of loans falls slightly short of the EUR 120-130bn figures which were leaked last Thursday, when bonds started rallying. We doubt this will be a source of disappointment, however. The German Parliament’s discussion of the bilateral loans, and the ECB’s press conference on Thursday, are also likely to add to volatility. On net, further relief is to be expected as these hurdles are also cleared.
4. Where Greek debt will price in coming months remains highly uncertain. The severity of the adjustment will continue to leave the scenario of a voluntary debt exchange on the table, in our view. Greek 2-yr and 5-yr benchmark bonds closed on Friday around 80-85c using mid-market levels, or 10 points below where they stood before the EMU/IMF agreement on 11 April. In the historical and cross-sectional experience of sovereign restructuring over the past decade, face value ‘haircuts’ have been in the very broad region of 25-55%. Going with 30%, and assuming that in a ‘best case’ near-term scenario Greek 2-yr benchmark paper trades at a 300bp spread like the official funding on offer (or around par), current market prices would imply a 50-50 chance of a restructuring over the next two years. This is admittedly a back-of-envelope calculation which does not adjust for risk premium, but it provides a broad indication of market ranges from here.
5. A combination of lower risk premium as lenders and the ECB rally around Greece’s efforts, and a marginal decline in the restructuring probability in light of the austerity measures announced, could in the near term lead spreads about 200bp tighter at the 2-yr maturity to around 9-10%, and around 50-75bp tighter in 10-yr space to around 5.5%.
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Loans are backed or financed? What's that story?
The idiotic story here in the Netherlands is that we as a country are going to make money out of this deal because we loan the money for 1.5% and loan it to Greece for 5%. No it won't cost the Dutch taxpayer anything because we loan the money ourselves. It's free money sheeple move along.
I sent the Dutch Finance Minister an email suggesting Venezuelan bonds. Seems to me the best way to get out of this crisis is to turn your country into a hedgefund and just swarm the planet with your fresh 0% money
You honestly believe that you're getting your money back?
Argentina is offering a 66% haircut on their defaulted bonds. Do you think Greece will offer better terms?
“Greek banks refinance about 12 percent of their assets at the ECB, a situation that in the future will have to be corrected, but certainly not during the implementation of an emergency plan of support.”
One day! We promise! We will correct this situation. We promise....we really do....promise....that one day, future.....really we will!
nice. JCT. nice.
you are doorknob.
The main stream media has made it look like this "contagion" started with Greece, but it actually started with Ben Bernanke and the Federal Reserve because the ECB and IMF have caught the "too big to fail" contagion.
Another Kabuki dance:
http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2779&tx_ttnews[backPid]=901&cHash=9b810cf24c
No cut to the military spending...!!!
Thanks; pretty remarkable isn't it? When the first reports of a public-sector pay freeze came out, it was apparent that something like this was on the cards.
TD - Great work as always. I just want to comment on, "Surely this is a bargain compared to the $20+ trillion that the rescue of the US ended up costing." to say it ain't over yet. For example, California's $20B deficit is supposed to be worked out before July.
Mosler via PragCap:
“The size Greece ‘needed’ implies the others will need numbers beyond euro zone capacity, especially as the Greek deal used up euro zone capacity.
So this means Greece is the last rescue possible- the rest are on their own. They wanted to stop the contagion, but that would have had to be done by showing they could save Greece without weakening themselves, and in a manner that shows they can help any and all. They didn’t do that. Instead they showed the effort necessary to save Greece was so large that they don’t have the means to save anyone larger than Greece.
So now they are performing without a net. And, as Marshall (Auerback) put it, the austerity measures are likely to increase rather than decrease deficits, making it all that much worse. This euro zone problem is not going away.”
http://pragcap.com/europe-is-now-performing-without-a-net
So greece can simply write " I O U 60 billion euros" on a piece of toilet paper and hand it to the ECB. ECB will give them 60 Billion. Voila- no need for Germans to tie themselves into knots to get approvals for bailout loans.
This is the Bernanke Technique. Free money to all. Actually free money is only to those who wont spend it. If you need $5 to buy a sanwich - you have to work in the yard for an hour to "earn" it. This is essential - need the sandwich buyers to always be short of money - thats what gives money its power.
Yeak - OK the Euro will obviously decline if Trichet monetizes the PIGS. But so what? Why impose real hardships - to defend a worthless piece of paper? Bernanke has shown the world that you can do this kind of thing - and you dont get hyperinflation - at least not right away!
Hey Portugal, get in line you're next for freebies!
Oh well, it's only printing presses at work I guess since Fed, ECB
figured that one out... Until not..
Given the precedent set, I can't wait to see Spain and Italy get their bailouts.
Because you know their leaders are taking notes.
My bet is Bennie Mae is LHAO, as the ECB is even more willing to trash their currency than the Fed and the USD.
ECB has room to play. Once Euro gets under 1 to the dollar - then he can always raise rates by 25 basis points. This stuff is EASY - I dont know why the Europeans are knocking themselves out pretending that the Euro is like gold coins or something. Eurozone economy is about as large as the US - so Trichet should mimic Bernanke and buy 2 Trillion of junk govt paper from the PIGS . Then he and Bernanke can spend the next 5 years writing academic papers on all the techniques they have to remove those assets from the CB balance sheet. No need to actually do anything though. Just make sure the money primarily ends up in banks and with billionairs who wont spend it.
as of last Friday :
Cyprus parliament approves 60-mln-euro aid to Greece.
Belgium has already approved a text of a draft law for its €1.07bn contribution.
German could approve a law to provide Greece with €8.4bn in aid by May 7.
Finland to discuss its €550m contribution in parliament in early May.
Slovenia’s €144m contribution is expected to be approved by parliament in late May.
Portugal to present its €770m package to parliament, no date assigned.
French package for €6.3bn aid still needs approval by both houses – could be passed by May10.
Slovakia’s €310m contribution still being reviewed.
Ireland is preparing national legislation for its €490m contribution
Netherlands to approve its €1.8bn aid package day after IMF complete their review on May 15.
Malta has agreed to provide €27m – no word on approval.
Luxembourg has agreed to provide €80m – no word on approval.
Austria to approve its €858m aid package when Greeece fulfils every condition to aid set out bythe IMF.
No indication from Italy yet on when its €5.5bn contribution will be put to parliament.
No indication from Spain yet on when its €3.7bn contribution will be put to parliament.
Would seem like far from a "done deal" IMF will have to stump up no ?
This is the truth behind the headline.
It still needs to be approved in 15 parliaments.
Many of these parliaments are representing populations that are very anti any greek bailout. Not just the Germans.
Elections aren't that far away in some of these countries.
Also, many of the governments are coalition governments where a lot of MPs from minority parties need to be corralled into agreement. Not an easy task at the best of times and one sure to be made harder by the political dividends on offer from grandstanding against the bailout.
The ECB taking junk seems to be an acknowledgement of the fact that parliamentary approvals might not be forthcoming so it gives them a way of getting through May without needing any democratic approval.
So this about the 15th, or maybe 20th time they've announced they've solved the Greek crisis, and we've probably about 10-20 announced solutions to go before the Greeks finally default.
It will be through all those parliaments in no-time. The only last bastion of resistance is the German parliament.
I can speak for the Dutch parliament where they last year debated more about a ban off the headscarf for muslim woman than on the €20 billion bailout they gave ING and the €16 billion nationalisation of ABN-AMRO/FORTIS.
These ''elected officials'' don't know a thing about finance and what kind of consequences it will have for the country. So they just vote "yes" so they won't have to look stupid in front of the populace who also does not know what it is all about.
aus_punter why does that say €500m for Finland when we get €1,5 bil in our evening news here in Finland??
Is there something that I do not see here?
Yeah - still suffering from gold standard syndrome I guess. The Euro aint gold - no matter how hard everyone tries to pretend. Therefore it is not constrained by Newtonian mechanics of a gold standard. We are in a quantum realm of vapor money. Money is created and extinguished in a nanosecond. It take no energy or material to create money - it has no value whatsoever. The peasants , however, must be kept in a state of money deprivation - in fact this is critical to the whole scheme.
To complete my quantum theory of Bernanke Bucks. Yeah the peasants must always be short of money. You have to monitor this closely. Wages going up is a problem. I they go up , taxes must be raised so the peasants dont get to keep much if any of the increases. Prices of goods and services must ideally go up at a nice steady clip - so that after taxes and inflation , the peasant is never any better off. Subject to controlling this aspect very closely - your freedoms to play around are immense. You can print a Trillion Zeuros , you can buy any old crap in exchange - does'nt really matter.
A crowd mind can only perceive differences which are very large and which occur over a short period of time, in other words, they only recognise obvious changes.
Extract below from "The Crowd, Study of Popular Mind" Gustav le Bon (written around 1860) (a farthing is a quarter of an old penny and is no longer in circulation, in fact the current penny is equivalent to two and half times an old penny)
“It is only by obtaining some sort of insight into the psychology
of crowds that it can be understood how slight is the action upon
them of laws and institutions, how powerless they are to hold any
opinions other than those which are imposed upon them, and that
it is not with rules based on theories of pure equity that they
are to be led, but by seeking what produces an impression on them
and what seduces them. For instance, should a legislator,
wishing to impose a new tax, choose that which would be
theoretically the most just? By no means. In practice the most
unjust may be the best for the masses. Should it at the same
time be the least obvious, and apparently the least burdensome,
it will be the most easily tolerated. It is for this reason that
an indirect tax, however exorbitant it be, will always be
accepted by the crowd, because, being paid daily in fractions of
a farthing on objects of consumption, it will not interfere with
the habits of the crowd, and will pass unperceived. Replace it
by a proportional tax on wages or income of any other kind, to be
paid in a lump sum, and were this new imposition theoretically
ten times less burdensome than the other, it would give rise to
unanimous protest. This arises from the fact that a sum
relatively high, which will appear immense, and will in
consequence strike the imagination, has been substituted for the
unperceived fractions of a farthing. The new tax would only
appear light had it been saved farthing by farthing, but this
economic proceeding involves an amount of foresight of which the
masses are incapable.”
The ECB is doing whatever it takes to protect the Euro and Eurozone. It is about time they wake up.
The FED is printing
The ECB is printing
The BoE is printing
The PBoC is printing
Got gold?
I don't think you all are pondering well enough what exactly Ben and the Treasury are doing when the off Europe "dollars." In other words "whose being enslaved here," the Europeans? Clearly it is more than an "affront" that of all people Ben Bernanke is saying "have some worthless greenbacks" no? So, no, Trichet is not "playing the Bernanke game." He's trying to AVOID that at all costs. Now of course in all this discussion no one is talking "Greece." Aren't they the most important part of the bailout? I believe the word is "general strike" and the time is "Wednesday." Let us not forget: Greece and Spain are Socialist governments--any questions as to why THAT'S never reported? Not even here? Indeed "moral hazard" doesn't even BEGIN to describe what's going on here.
Gotta get down the Shakedown Street
Use to be the heart of town
Don't tell me this town ain't got no heart
Just gotta poke around....
The ECB is basically saying to Germany - if you dont provide bailout funds , I'll just print some up. The Euro crash over the next couple of days should scare Germany into voting for the bailout. This is what I think is going on.
EUR down, Gold up, Silver up.
All you need to know.
when you lower your standards you get what you deserve
OK, I think I need some help here. So the Greeks will, so far, remain in the EMU. That is, the Greek govt will raise taxes and the banks operating in Greece will demand pay in Euros. However will these money remain in Greece or will they be used to service debt amassed by both the Govt or the banks? Will they be deposited in Greece or elsewhere? Should the answer be negative to any of these questions, it seems to me that Greece is turning to a pond from which the water is draining fast.
However, in the meanwhile, the ECB receives Greek bonds as collateral for clean loans in Euros, in other words bond holders are able to convert these into Euros with which they then can buy hard assets in Greece - nice Mediterranean estate, for instance. Will the Greek demos just lay there and see their remaining assets scooped from under them like fish from a drained pond?
So, help please, am I seeing things or is the situation shaping up for a nice conflict across Europe?
DOW/SP500 intra day chart gives bullish signal.
Interesting ...
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