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Expanding the LTRO Looting Program
Here's an interesting addition, via Izabella Kaminska at FT Alphaville, "Turns out that not all the national central banks of the European System of Central Banks (ESCB) are so keen on widening collateral criteria, especially the idea of taking on more bank loans (tweaking the eligibility of credit claims) in exchange for central bank lending." (Let there be credit claim collateral… just not everywhere.)
From Bloomberg on Wednesday (H/T Sean Corrigan):
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Feb. 1 (Bloomberg) — The European Central Bank’s plan to accept more bank loans as collateral may not be used by all euro-region nations, threatening to fragment the rules applying to bank funding operations, said two euro-area officials with knowledge of the discussions. The initiative is likely to be implemented on a voluntary basis by national central banks and several of them may opt out, said the officials, who declined to be identified because the information is confidential.
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Germany’s Bundesbank has indicated it may be among those to shun the measure, arguing the country’s banks don’t need to borrow more from the ECB. An ECB spokesman declined to comment.
See also: Survey of Banks Shows a Sharp Cut in Lending in Europe, NY Times:
FRANKFURT — Banks in the euro area cut lending sharply at the end of 2011, according to data published Wednesday... A quarterly survey of commercial banks by the European Central Bank showed a surge in the number of institutions that were becoming more restrictive about who they lent to, because the banks themselves were having trouble raising money and were under pressure from regulators to reduce risk.
And: Crunch de crédit continu (et collateral). (Here's the survey.) ~ Ilene
Expanding the LTRO Looting Program
Courtesy of Russ Winter of Winter Watch at Wall Street Examiner
When you hear talk about expanding the European LTRO funding, it is important to go straight to the mechanics of the exercise, and then ask what does the new round of exposure mean to the ECB.
The LTRO is a repo transaction where the ECB takes in collateral in order to back any loans. The ECB will swap cash in exchange for questionable assets so that insolvent banks can replace funding caused by de facto bank runs. If they choose, they can then double down on sovereign bets, or pay off creditors. Italian banks in particular are so exposed to their own sovereign debt that they may have decided to gamble away, figuring they are dead anyway. Might as well take the ECB with them. But we need to constantly ask ourselves what is the risk to the ECB itself, and by extension Germany, France, Italy and Spain, who are the principal sponsors of the ECB. What happens when the banks evaporate in the next debt hiccup and the ECB needs to seize the collateral.
This article at FT Alphaville by Joseph Cotterill provides the gory details.
It appears the LTRO has mostly been about a cozy arrangement with French banks, and to a lesser extent Italian banks. The ECB quietly expanded the list of collateral it would accept by more than a third at the start of the year. Almost all the 10,599 debt instruments it added were from banks – and more than 8,000 of them from French banks. The ECB is going about accepting unlisted bank bonds — i.e., bonds that the banks could have issued purely to themselves solely in order to pledge them as collateral for central bank funding. They carry no prospectus, etc. If the ECB we-take-no-losses-in-defaults model holds true, then other bank bondholders will be further subordinated down the capital structure.
Wonderful, the ECB can secure its lending to these already hyper-leveraged exposed banks, with flaky bonds issued by the same cast of characters. How is that going to work in a pinch? Oh we already are in a pinch. It is obvious that Europe is now “all in” and fully prepared to go down with their bankster cronies. (Chart by Trend Macro, Unlisted in euroland)
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The Euro was created by France to circumscribe the power of the Bundesbank. It has worked exceptionally well for France. The main aim of French foreign policy is to keep Germany on a short leash and hand onto its coattails in the hope of either slowing down take-off or at least clipping its wings. France sees Europe as a colony- it always has - whether Bourbon Kings or Republican Imperialists or modern-day Monarchical Presidents.
This time the implosion will blow France apart and maybe restructure its political geography
This is a great article. I have been trying to research the effect of the value of the collateral changing that is pledged for funding from the LTRO mechanism. JackchanHK85 asks some good questions. Just what is the margin for the different types of collateral? And what point would margin calls take place if the valu eo fthe collateral decreased. Its all adding u now why they are totally shitscared that greece avoids a hard default and their is a systemic shock now the ECB balance sheet is also on the line and any hint of collateral devaluation coud see one mother of a amrgin call.
With the spreads on short dated peripeheral EUR paper collapsing why would you head for the LTRO and play the carry game ? Furhtermore, carrying these bonds on your book (even via repo) requires capital (50% for Italy since downgrade) or am I missing something here.
It is very simple. If the borrowing bank uses the cash to speculate in gold, it will drive up the price of gold. The ECB then buys the inflated gold from its bank, extinguishing the debt and giving the bank a nice profit. Gold is the one commodity that Central Banks are allowed to buy and hold forever. Eventually, when the ECB scarfs up all the world's gold, the Eurozone moves to an internal gold standard.
just few questions, anyone would help ?
1. For those collaterals taken by ECB from European banks, what happens if those collaterals getting hair cut or a sharp decrease in value,
Will ECB ask for more collateral i.e. any margin calls from ECB to European banks?
How the decreased value in collateral reflects in ECB balance sheet & European Banks balance sheet?
2. Is it the same apply to LTRO?
3. What happens if when those bond collateral within the LTRO get matured and the bank can’t pay it back?
Will ECB take all the loss?
4. Is there any mechanism for ECB stakeholders to run away from its responsibility of contributing to ECB?
Rothschild Bank AND Goldman Sachs Are Both On The LIST Of Bondholders Getting U.S. Taxpayer Billions In Ireland
You are exactly correct and why I place no faith in gold for the long term. So why isn't this guy correct also:
http://pragcap.com/
and why I place no faith in gold for the long term.
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That is exactly why i do have faith in gold long term-
Money/currency is king in deflation and gold is the king of all money and the king of all currency-
But if the money is not making it into the Money Supply how can you have inflation and why buy gold?
But if the money is not making it into the Money Supply how can you have inflation and why buy gold?
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The story that gold performs during times of inflation is a myth-
http://www.acting-man.com/blog/media/2012/01/usgmonth-1.gif
We know that from 1980-2001 we had inflation all the way amd look how gold performed-
In 2001 something "different" happened-we know we had inflation but gold reacted "differently" than it did during the normal run of the mill inflation of the 80's and 90's-
What we had was abnormal inflation-in fact i will go as far as to say we had hyper-inflation-
Remember-inflation is an increase in the money "and" credit supply-
Too few people look at the credit supply and only focus on printing-
The credit supply is leveraged to the cash supply by a large factor-
http://research.stlouisfed.org/fred2/series/TCMDO
http://research.stlouisfed.org/fred2/series/BASE
Gold only performs in 2 instances-
Hyper-inflation and default risk-
IMO-we've had the hyper-inflation and now we face default risk/deflation-
Gold performed better than any other asset during the 30's deflation-simply because gold is money-it always has been money and nothing else-
http://4.bp.blogspot.com/_nSTO-vZpSgc/RbZwf5lgCXI/AAAAAAAAAN0/WJYO6dh-og...
http://2.bp.blogspot.com/_nSTO-vZpSgc/RbmMtplgCjI/AAAAAAAAAPk/NtN5JDlwHi...
"Gold only performs in 2 instances-
Hyper-inflation and default risk-"
I agree, but Hyper-inflation is a form of reality affected by demand as was the 70's and that reality was driven I believe by boomer demographics and negative corporate tax structure and pre automation boom. Reagan solved a lot of the problems by deregulating, helping corporations and hurting the self employed with the self employment tax. We are paying the price for Reagan's actions now. The boomer demographics have reversed. (boomers are and will be buying much less as they retire) The middle class is taxed during hard times now while corporations often pay 0 tax. Read "The Age of Greed" These voodoo economic policies have destroyed the middle class. (not to be too hard on Reagan - he may have been right for the time but wrong now)
"default risk" however is a forward looking potential risk and highly charged with opinions and fear. IMHO Europe is risky, but the US less so. I could be wrong but I believe the worst for Credit Risk in the US has passed. I was sentient during the seventies and I saw gold and silver climb quickly but come down almost overnight. There is risk with gold as well.
http://www.zerohedge.com/news/europes-great-deleveraging-has-only-just-begun
Europe, well that is a different story. I think at least three countries will leave. One may actually go in.
I was sentient during the seventies and I saw gold and silver climb quickly but come down almost overnight. There is risk with gold as well.
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The reason gold crashed back then was because Volcker raised rates to 20+ % and they were able to create inflation (credit expansion) 1980-2001-
That option is still there-but that would cause a debt implosion with catastrophic defaults across the globe-
The USD would go to the moon and trade would vanish-so i really doubt they'll take that road-although they probably should-
Gold has risk but only in the sense that they would do the above-of course the gold price will fluctuate in a wide range-but very few people have exposure to gold-i know it doesn't seem like it reading ZH but look at the data-
http://www.acting-man.com/blog/media/2010/10/Gold-percentage-of-financia...
http://www.acting-man.com/blog/media/2010/05/gold-and-other-bubbles.gif
http://www.acting-man.com/blog/media/2010/05/gold-vs.-past-bulls.jpg
I thought we already had inflation due to high boomer demand for goods and low productive output and Volker raised rates to slow down borrowing for more demand. Factory automation, of which I'm part, also contributed to the turn around as productive output increased to meet demand. Reagan finished the solution by helping producers and instituted a self employment tax which I paid. (I hated it then but now I see he was correct to stifle demand with taxes it's just that I bore the brunt of it at that time) Corporations wised up and moved off shore and now we are paying for it. Debt stifled demand. Less demand equals less jobs and less jobs equals less demand and fear exacerbated the problem.
What we have now is exactly the opposite to then. We have high productive capacity(China) and low demand due to job fears and high debt and boomers retiring. Interest rates will be low for a long time to stimulate borrowing and demand. What we have here is the same, but not as bad, as Japan. It's because we have the same demographics only not as bad and slightly delayed.
Do you have figures on demand for gold in Japan??
Anyway, I'm almost outa here. Been a pleasure. Have a good weekend!!
Vicks has a solution. If there's debt in the markets, vaporize it.
a mere "Road to Serfdom"? More like an Intergalactic Superhighway. All asset classes are now moving in lockstep together higher. And i'm told to buy. All of them? At the same time? Drain the cash to zippo? REALLY?
http://www.youtube.com/watch?feature=player_detailpage&v=iqGApLb5ihw
take that sell sider.
To summarize: the ECB is trading worthless paper (fiat bank loans) for worthless collateral and hoping no one will notice the possible future default ramifications. Yep, sounds like a plan until the big bank runs start in France and Italy.
The PHIIGS (Hungary added) should form a coalition (how about Group Of Nations Against Debt Slavery?) and have a coordinated default. Greece can be marginalized and deemed irrelevant but the PHIIGS' GONADS could not. Their negotiating power against bankster leeches would be very strong.
The troika is a coalition that needs a countervailing force. GO NADS!
Sounds like a strategy for regional military conflict.
You have a rule and keep it, or there are no rules, at all. The Eurozone is about to wake up to a bad case of the hershey squirts.
http://thedailyclimb.wordpress.com/
The Eurozone violated the Treaty rules before the ink was even dry. There are no rules, only what Germany and France will let them get away with.
Maybe if even Luxembourg or Finland electe to leave the Ponzi, it might not be too late for them.
Ilene, you are a terrific asset to ZeroHedge.
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"QE to infinity in the entire Western financial world. There is no other alternative."
- Jim Sinclair, Mineset
R u the J. Sinclair of "5 american banks who hold 97% of CDS..." thingie and ISDA rant?
If so, hats off to u too!
http://www.investorvillage.com/mbthread.asp?mb=144&tid=11403736&showall=1
IN THE ATTACHED LIST OF THOSE WHO VOTE AT ISDA, CITI IS ABSENT.
CARE TO COMMENT ON THIS?
BTW : LOTS OF FRENCH AND EURO BANKS THERE!
Thanks.
Hahahahaha! I wonder who the two anonymous cowards are that gave the down arrows to this compliment? You 'gotta love the internet! You can be a gutless coward troll all day long!