Spanish Banks May Face €17 Billion Margin Call As ECB Found To Lie About Collateral Haircuts
Mario Draghi has reassured the world that no matter how much 'crap' collateral is taken on to the ECB's balance sheet, their risk management process is rigorous and ensures the safety of the entity's capital thanks to well-devised haircuts and collateral. Once again, it appears from a report in Die Welt (via Bloomberg), Draghi lied, as the ECB is now checking terms on some lending to Spanish banks that may have already contravened the ECB's mandate allowing overly generous terms to be offered on the Spanish banks' collateral. As Bloomberg notes, the issue surrounds EUR80bn relatively short-dated T-Bills which were wrongly classified as rated 'A' instead of the 'B' that agencies - except DBRS! - had assigned (a vast difference) - which would imply (if the ECB re-assigns the correct rating) the affected Spanish banks would have to produce up to EUR16.6bn in additional collateral (cash or quality collateral that is non-existent in Europe). This of course "casts doubt on the quality of the ECB's risk management" and merely serves to confirm the Juncker-ian lies we have come to expect from Europe's leaders (economic and political).
As a reminder, we warned of exactly this back in April and it seems the ECB has merely chosen to ignore it for months:
...The first is 5%. This is the haircut increase that ECB collateral will require once all ratings agencies shift to BBB+ or below (meaning massive margin calls and cash needs for the exact banks that are the most exposed and least capable of achieving said liquidity)...
and it appears that the ECB read our report of what could happen, comprehended its severity, and decided that it would be best to not let that collateral crunch happen. As to how to avoid it happening? Simple: ignore its own collateral rules!
The European Central Bank has Spanish banks borrowed 16.6 billion euros. But the collateral do not even meet the individual requirements of the central bank.
It is a subject in which representatives of the European Central Bank , always place a look that will inspire confidence and simultaneously acts annoyed. Repeatedly accuse critics of the ECB, it was almost mindlessly generous with the securities, the banks have to pledge as collateral for their Fed loans, they now accept any junk.
And again countered ECB President Mario Draghi stressed such accusations cool. "The risk management of the ECB is really very careful and has earned this recognition, "he said, for example, in the spring, after Bundesbank President Weidmann warned of growing risks in the central bank's balance sheet. And shortly afterwards the Italians said, even ironically, central bankers made ??their "likes to worry about things that no one else cares to make."
Fed much more lax than the official line
But apparently makes you look in Europe rather too little to worry about the risk policy of ECB . Because the actual line of the central bank is much more lax than the official. Currently, the shows in dealing with Spanish bonds. Loans of up to EUR 16.6 billion commercial banks have received from the central bank, although the money to research the "Welt am Sonntag" should not have got - if the ECB would apply their own statutes strictly.
Because the Spanish government bonds, the banks have been pledged as collateral to satisfy the requirements of the Central Bank only partially. The huge sum of 16.6 billion in itself is alarming - but even more alarming is that the ECB seems certain risks simply overlooked. Either from carelessness or intent. Neither is reassuring.
Banks can borrow money at 0.75 percent
Since the peak of the financial crisis, Europe's banks can borrow unlimited amounts of money from the central bank, currently the tiny interest rate of 0.75 percent. The only limit: you must pledge securities or credit claims as collateral for the central bank to get their money back.
The requirements for these securities, the Governing Council has scaled down over the past few years more and more. And that the central bank in practice might not even with these lax requirements taken very seriously, showing its current handling of Spanish government bonds with up to 18 months duration, so-called T-bills.
Whose volume is now running at 80 billion euros.
Spanish T-bills do not meet solvency rules
The problem is that T-bills no longer fulfill the conditions for this first-class credit rating. Papers from 66.5 billion euros are really just second class and should therefore under ECB rules are provided with a higher discount of 5.5 percent - which would mean 3.3 billion euros less credit for the banks. The remaining T-bills in a volume of EUR 13.3 billion figure is only mediocre - they would no longer accept the central bank as collateral.
The decisive criterion in this business rating scores. In the highest rating category include only securities from at least one rating agency with the "A" grade. This is at issue T-bills is not the case: they come from the major rating agencies, Standard & Poor's, Moody's and Fitch are only notes in the 'B' range and therefore only second-rate securities. For two of the bonds, there is only one note from S & P, and not even enough for the lowest category.
ECB accepts little known rating agency
Confronted with the peculiar reviews, the ECB provides answers only raise new questions. First, she asserts, everything has its accuracy. The haircuts for the Spanish T-bills are "properly calculated because the rating from DBRS currently 'AL' is'. In fact: The little-known, but by the ECB recognized rating agency DBRS Spain has awarded an "A (low)", still a first class classification.
However, this grade is according to the agency really only useful for long-term debt of Spain, short-term credit awards not DBRS. The ECB is challenging not to: Such ratings would be accepted for short-term bonds, the central bank can do. Of which is the official, after all 148 pages of rules for the strong valuation of collateral course nothing. The ECB points to another, non-public Manual - to the derogation was captured, and had been since 1999.
For Ireland seem to apply different rules
Strange though: Up to Ireland seems to be the secret handbook not yet penetrated . Because even though Ireland is by DBRS also rated "A (low)", the Irish central bank considered the T-bills the Irish Government only as second class and provided with correspondingly higher markdowns, to the detriment of the local banks that these papers-ECB collateral use. And the Irish are committed to this approach: Twice the Irish central bank explicitly confirms the classification made ??was incorrect. The two T-bills had their own rating to "B"-level classification in a better risk category is not appropriate, therefore.
ECB refuses to clarify the facts
For the banks that hold these T-bills, such a correction would be highly controversial. So far, the government securities they were for a good deal. You can borrow from the ECB for only 0.75 percent of money and buy it T-bills, which bear interest at 2.8 percent. But with a downgrading of securities throughout the calculus would zunichtegemacht, instead funding problems could even threaten. Because in this case they would have other collateral of up to 16.6 billion euros in their book. Or they have to repay central bank loans and get the money from other sources.
The ECB found itself by the end of the week not in a position to investigate these oddities in their security policies. The issue would be examined, a spokesman said simply. In general, the ECB refers to the fact that most European banks had deposited with the central bank more collateral than the loans granted is actually necessary.
Spain would support themselves if necessary banks
Whether this is also true for all the Spanish banks remains unclear. Finally, many institutions in the country battered and get fresh money almost exclusively from the central bank. In the worst case, the banks would have to ask at the Bank of Spain to expensive emergency loans. A step on the way the ECB would not tell the public.
Confidence in the central bank to strengthen this kind questionable steps, anyway. It swings the ECB to just become more powerful, they will soon also control the banks. But they should do so credible when they are not even their security policy for banks, their very own business, under control? Critical observers ask is: who actually controls the ECB?
So, the ECB defends its decision for Spain on the back of a lone rating agency DBRS holding an A-Low rating (which itself says is not representative) and also is in direct opposition to the treatment of Ireland (which is collateralized as a 'B' rated credit while also maintaining an 'A-Low' rating with DBRS!).
So it would appear that if a hedge fund really wanted to see Draghi sweat and bring Europe's teetering-on-the-brink edifice to its knees, it merely needs to pick up the phone and request DBRS to create report on Spain's short-term financial health - since surely they like the other three raters will see the dismal and accelerating worse state of economic dysphoria and be unable to maintain an 'A' rating on this nation?
We sense Irish eyes will not be smiling and Draghi's nose may be growing once again... and we laid out the implications here.
This is now the story of the weekend!