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Portuguese 10 Year Bonds: Whoooooosh, As European Commission Releases Consultation Paper On Bank Senior Creditor Impairment
Paging JC Trichet: time for the spanking of the wolfpack. The reason for the anal prolapse in the Portuguese 10 year is that it is now expected that the country will issue new debt on the 12th... and that the auction will be less than stellar.
Elsewhere, the EUR just got taken to the woodshed following the release of the EU's consultation paper "which aims to abolish the excuse that a bank is too big to fail" and "asks whether bank bond holders should share in paying for future
bailouts and seeks to give greater authority to national regulators over
bank leadership and business strategies when a country's economic
stability is at risk." If this thing passes, watch out below SovX and iTraxx Fins. The FAQ and the actual release can be found here. Those who wish to avoid the 100 pages, can read the Dow Jones summary below.
The European Union is proposing an area-wide framework for confronting bank and investment firm failures that includes getting bondholders to share the burden.
The EU executive arm, the European Commission, Thursday released a hefty 100-plus page consultation paper open to public comments until March 3, which aims to abolish the excuse that a bank is too big to fail. It asks whether bank bond holders should share in paying for future bailouts and seeks to give greater authority to national regulators over bank leadership and business strategies when a country's economic stability is at risk.
The goal is for key bank services, such as withdrawing deposits and making payments, to remain unaffected in the process of a winding-down and so that the cost of that winding-down doesn't weigh on government budgets.
"It can be intrusive," said an EU official, but should be used when, "necessary, justified, proportionate and aimed at achieving the right outcome."
The lack of a EU-wide game plan in the case of a bank collapse and rules for engagement between countries heightened the uncertainty during the financial crisis, given the number of institutions that operate across borders and co-dependency between countries. The crisis highlighted that many states were ill prepared to provide financial assistance to banks integral to their economic system. Banks, too, were found unready to plan for their own exits.
Officials plan to propose legislation in early summer, although it is unlikely to come into force before 2013.
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As broken as Europe is, at least some of them insist their problems be dealt with in reality as compared the these US bozos who insist the can be kicked down the road forever and pass out double blindfolds to anyone who question it at all.
The problem is that if this goes through, who the hell would invest in European bonds?
Knowing you might have to take a haircut will lead to an instant rise in yields to compensate for increased levels of risk.
While you are correct that the rates will go up (as they should when you are lending to entities and people less than qualified from a character standpoint to get a loan) but it is not due to increased risk it is due to the allocation of that existing risk. This would be a much better thing is the bond holders would take a haircut that would keep the spending in line.
Let me get this right - so what you say is that because risk increases in (say) Greek bonds, capital will be reallocated to a different asset with a risk profile which matches the risk requirements for the capital in question?
It is very interesting this intersection between money, geopolitics, politics, idiocy, hope and fear etc. I think we are beginning to see the manifestations of that. What I think I am saying is that the risk was always there and was mis-priced and mis allocated. I also think shifting the burden of assessing risk to a bondholder as opposed to a tax payer (e.g. FDIC, SPIC, BAILOUTS etc.) you will get a real or "better" evaluation of risk.
Take Greece for example. The only way they got away with what they did for so long was not due to people not knowing they were lying through their fucking teeth about every number put out, it was because the investor knew they were going to get bailed out by the taxpyer. That is why they accepted a lower return.
If an investor in that sector of finance were to know the taxpayer was not the backstop for financial loss I think their finances would be under more scrutiny and controlled better. Nobody would have lent to Greece in order to underwrite some 50 year old's retirement. Productivity would have been the outcome. And just like the Germans are getting sick and tired of paying for Greece's largess the ever shrinking pool of entities who fund this government's largess will stop as well.
If an investor's risk profile is very low and risk were allocated to the investor as opposed to the taxpayer they wouldn't invest in certain area e.g. Illinois, CA, NY etc. They would have no choice but to cut spending. The only other alternative as I see it is to suspend the use of math. I sure that is being explored by someone.
As opposed to a (hyper?)-inflation-masked haircut in other bonds?
Who would invest? Are you kidding me? Maybe people who actually did some homework on their investments and were willing to carry the risk in exchange for the reward. It is about time people with deep pockets and insider contacts stop assuming they can reap massive gains without having to do any homework or carry risk that is proportional to the reward. the latter is why the system is failing to begin with.
How would you respond to having to invest in risky asset, because you can "no longer assume you can reap maximum rewards"?
I seriously doubt it works that way. Free markets surely mean capital is allowed to flow in any way it wants.
How do sovereign guarantees backed by taxes result in free markets??
Check your premises.
Europe is in the midst of a solvency crisis. The bozos in the US think this can't happen to them as they have Bernanke's printing press.
"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
Agreed.
The bankster method is to take huge bets on the roulette table of bonds and CDS with other people's money (sovereigns, pension funds, insurance companies, municipalities etc) and when the bet goes South to have the middle and poor classes (via TARP, QE2, inflation, austerity measures, mass firings-high unemployment, etc.) pay dearly for it.
Enough. Rationality mandates that if you play the game, then you pay for it when you lose.
Why is so hard for EscapeKey to understand this?
It's not that "it's so hard for me to understand this", it that the argument rests on morals, which play no role in this.
No, it is called moral hazard, a real economic phenomenom.
Also it is theft, call it fraud, call it kleptocracy. Call it moral or what-not, the fact remains that it affects economic growth, confidence and the social contract. If the law is made not to apply to a certain select few, than sooner or later it will create a backlash that will destroy that society. Pure reason supported by historical precedence, really.
Would you gamble in an establishment that took 30-40% of your chips and moved your hotel room to the laundry room if the big cats lost?
Only an idiot would continue to patronize such Circus-Circus.
I would think this is common sense. Am I missing something?
Moral hazard => allowing the bankruptcies.
Moral hazard is not about creating some arbitrary system where some centrally organized entry dictate whether it's "fair" you take on additional risk with your savings, after the entries which should have gone bankrupt, have been bailed out.
That is what we have been trying to say.
IMO, that is what this Euro proposal is trying to do also, but limited by bankster antagonism.
What the ECB is doing now is backstopping all risk by buying bonds with money it does not have, thus lowering the interest rate. If that is not fascist/commie central planning than what is?
No one that I've seen in this thread is arguing that you should not risk your own money for your own gain. What we are saying is that if you do that than be prepared to risk it, not to shuffle it towards the public.
Maybe we agree on this, but semantics are getting in the way.
Gotta get to work. I'll follow this thread later.
Take care.
In the US the govt. has promised the sheep all it can desire at the end of the "life rainbow" in exchange for not rioting and demanding stuff for the society and from the minority of super rich. These conmen and women who are in the halls of power are so bought and paid for that they can't tell when they where even bought.
And what's up with EUR getting crushed today. Usually it's up on big POMO days...
It's putting lipstick on the pig dollar. Trying to hide inflation on the dollar that is starting to killing people with food prices.
That is just crazy talk. There is no risk to capital, only returns.
Yeah, good luck with anti-TBTF-talk. The only institution that is big enough to fail is the taxpayer in these days...
And now that the taxpayer is bled dry by any measure, what next?
We bleed the taxpayer's dog.
Deutsche bank saying that move started as a strike, obviously for comedy effect as it turns out it was only a 20mln payout.
It is about time people and organizations with insider contacts and access to massive capital carry the appropriate risk for the "rewards" they reap. The system is failing because the elite have gotten used to not doing their homework (a.k.a. their JOB), privatizing profits and socializing losses. Good for the Europe, but for now it is only talk, so the Euro will get crushed for thinking so responsibly.
This is a rather common sense approach.. the bondholders SHOULD take haircuts. The problem with this common sense scenario is that these bondholders might begin liquidating their riskier bonds en masse, nevermind the fact that nobody would further loan these risky countries (or their banks) any money. It becomes a self fulfilling prophecy.. and it might happen in one h&lluva hurry.
The massive discretionary construction activities seen in the western world and the shunning of capital intensive utilities such as nuclear power stations, rail lines etc is a direct result of the rise of the shadow bank sector.
If you destroy these shadowy funds the energy released via lower consumption of the oligarchical class could be transfered to non oil based capital creation.
The energy and banking crisis are two sides of the same trick coin.
State debt and bank debt are different beasts with different objectives.
2013? Oh, never mind: false alarm: as you were. As Richard Smith said
Of course 2013 is also the promised year of sovereign restructurings. All conveniently far in the future, so that in the meantime Merkel can keep doing Whatever It Takes to keep Ackermann in business. But in 2013 we're really going to get tough and face up to the consequences. Right.
"This is just the "bargaining phase" of accepting the reality of our problems in the global markets. They are trying to find some middle ground aside from resigning themselse to the fact that we have a big pill to take. The dead banks need to fail, declare bankruptcy, liquidate and pay the bondholders back (if they can). Without creative destruction, we simply grow the magnitude of the inevitable implosion.
2013 is way to late to deal with the problems of 2011
Is that one of those notorious credit market sinkholes?
A .500 basis point prolapse. Somebody pulled the ungreased baseball bat out too quickly while somebody wasn't relaxed.
The bond market needs grease your baseball bat enforcement division.
First sensible resolution proposal (need to see whether it gets implemented) that I have seen in the last 3 years. I hope a copy has been mailed to that cretin, "Great Depression Expert" Ben Bernanke