Why Are Central Banks Terrified of Debt Restructuring?

Phoenix Capital Research's picture

Back in 2012, Mario Draghi promised to “do whatever it takes” to hold the Euro together.


A lot of analysts interpreted this statement in a literal sense. However they are incorrect.


Draghi is willing to…


1)   Confiscate wealth by cutting interest rates to negative.


2)   Permit regulators to seize bank accounts to “bail-in” banks.


3)   Verbally intervene every time possible provided it pushes yields on EU nation sovereign bonds lower.


4)   Buy EU sovereign bonds despite the fact that this clearly violates the Maastricht Treaty (the treaty that formed the Eurozone).


However, what Draghi is NOT wiling to do is restructure ANY EU sovereign nation’s debt.


Why is this? After all, everyone knows that the whole problem for the Eurozone is TOO MUCH DEBT. And given that all of his efforts to inflate this debt away have failed miserably, a debt restricting is the only real option left.


Not to mention, debt restricting would actually reduce the leverage in the system and permit the Eurozone to return to growth.


Draghi won’t let this happen because he, like all Central Bankers in the world, is concerned about one thing: the bond bubble.


Globally, the bond bubble is $100 trillion in size. And sovereign bonds (the ones the EU doesn’t want to restructure) are used as the senior most collateral backstopping the big Eurozone banks’ derivatives portfolios.


Put another way, the €12 trillion in collected EU nation sovereign debt, is backstopping over €100 trillion in derivatives trades on the banks’ balance sheets.


Thus ANY debt restructuring in the EU would almost immediately blow up the large Eurozone banks because you’re talking about tens of trillions of Euros’ worth of trades having requiring margin calls/ new collateral arrangements.


This is particularly true because you’re not talking about just one nation restructuring its debt. All of the PIIGS would be up for debt restructuring followed eventually by France.



At that point, the entire EU banking system implodes and Mario Draghi is in the unemployment line.


You can see this line of thinking in the EU’s second bailout of Greece. If you read between the lines, you it’s obvious what really happened and what really mattered to the ECB during the Greek bailouts.




1)   Before the second Greek bailout, the ECB swapped out all of its Greek sovereign bonds for new bonds that would not take a haircut.

2)   Some 80% of the bailout money went to EU banks that were Greek bondholders, not the Greek economy.


When the ECB swapped out its Greek bonds for new bonds that would not take a haircut during the second Greek bailout, the ECB was making sure that the Greek bonds on its balance sheet remained untouchable and as a result could still stand as high grade collateral for the banks that had lent them to the ECB.


So the ECB effectively allowed those banks that had dumped Greek sovereign bonds onto its balance sheet to avoid taking a loss… and not have to put up new collateral on their trade portfolios.


Which brings us to the other issue surrounding the second Greek bailout: the fact that 80% of the money went to EU banks that were Greek bondholders instead of the Greek economy.


Here again, the issue was about giving money to the banks that were using Greek bonds as collateral, to insure that they had enough capital on hand.


Piecing this together, it’s clear that the Greek situation actually had nothing to do with helping Greece. Forget about Greece’s debt issues, or protests, or even the political decisions… the real story was that the bailouts were all about insuring that the EU banks that were using Greek bonds as collateral were kept whole by any means possible.


This is ALSO why the ECB doesn’t want Greece to restructure its debt today: doing so would begin to blow up the derivatives market eventually leading to the collapse of the big EU banks (the very banks Draghi has been trying to prop up at the expense of the Greeks, and other Europeans).


Draghi will do “whatever it takes” provided it doesn’t hurt the big bank. Unfortunately for him, he may no longer have a choice.



If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.


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Best Regards

Phoenix Capital Research



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crashguru's picture

I beg to differ, the real story was that the bailouts were all about insuring that the Greek Oligarchs (the owners of these banks) were able to move their money to London, Guernsey and Switzerland, because at that point in time the Greek banks didnt have anything left that could have bought foreign currency.

I remember very well how Papandreou was smiling from one ear to the other when he came back from Berlin where the slut had agreed to give them the German tax payers money. A couple of month later he resigned, probably he got a very generous commission.

Archduke's picture

Oustanding article.
Gets to the core of the issue.

We really should stop pointing the finger at germany for greece's problems.
Basically what happened with the Piigs is that everyone was in cahoots and colluded to make integration of the new european countries a reality. There was hope, hubris and euphoria, but to join up these corrupt and decrepit countries had to clean up their books. now nobody really expected corruption and culture to be fixed in 5 years. so they meant clean them or cook them, which the western banks happilly obliged.
This was done by underwriting new hopium bonds and balancing bad debt with hedged protection in the form of Credit Default Swaps. -everybody wanted a piece of that cake. DeutscheBank,DeustchPostal, BNP Paribas, SociétéGénérale, Dexia, RBS, Barclays, Goldman Sachs, Lehman Brothers, JP Morgan, CitiGroup, UBS, HSBC -you name it.
Every large bank knew that Europe would not let the project fail, and that the other end of the already fuzzy OTC CDS could be hedged away with the likes of unregulated protection insurers like AIG.
Then everything blew up.
In many ways the timely formation of new EU was instrumental in the crisis. Now it's time for the core European countries to own up. You wanted them to join. it's a good thing. a great thing. but weaker members need a helping hand: that's what a federation is all about.
You want to recoup your cash? go after the banks. discount those bonds. cancel the swaps.
and start with some fresh debt at realistic long term rates.

also from 2010:


Jack Daniels Esq's picture

ECB following Obama TBTF

Arnold's picture

They  will be choosy. I'm sure, behind closed doors, the sacrificial lamb has been chosen.

Someone will be forced to fail taking a single digit percent of bad debt away,

as example to the rest of the banking sheep to stay in the pens, facing the right way.

Won't be Goldman.

tumblemore's picture

They'd rather start WWIII than pay their gambling debts.

Hannibal's picture

Fuck the banks and the bond market, we'd all be better of without them.

Publicus's picture

Because debt restructuring shows the little people that you can simply cancel debt and it never has to be paid back.

Bemused Observer's picture

Yeah, well fuck Draghi, and fuck the bond market. The sooner the whole Potemkin Village of an economy has it's facades torn down, the better.

It can't happen fast enough as far as I'm concerned.

cifo's picture

"Mario Draghi is in the unemployment line"

This is where I stopped reading.



StychoKiller's picture

He'll be dragged out of his "spiderhole," kick and screaming (until someone crushes his skull with a rifle butt!)

lordbyroniv's picture

well..I aint paying my student loans.  FUCK THESE BANKSTERS !!!!!!!!!!!!1

mrdenis's picture

Me thinks Christie is setting up Atlantic to go bankrupt .....Joisey's first of many defaults !

NoWayJose's picture

Similar thing to what the TARP program did in the US.  Take toxic assets from the banks in exchange for good assets so the banks did not have to take a 25% haircut on their books and crash their own derivatives.

hibou-Owl's picture

If the EU banks Are using Greek bonds for collateral, they are already underwater. Didn't the yields just blow there top.

Who's holding the hot potatoe?

NoWayJose's picture

The Fed says the same thing about its TARP holdings -- even if bonds blow up in yield the Fed says it can just hold them until they mature -- then they are worth 100% of what the Fed/ECB paid for them.  Of course if Greece restructures or defaults then there is a problem.

cynicalskeptic's picture

Holding all that crap until maturity only means default for much of it - there's NO value left in many of those securities. Look at all the Mortgage based securities.   The mortgages were defaulted on long ago and the houses bulldozed in some cases.

Even if you have a security thta pays face value in 20 years it's LOST value because of the PLANNeD inflation over that time.

Meanwhile all the bankers kept their bonuses and retired - no clawbacks for them so why should they carewhat the hell happens.  Unless you take back ill gotten gains and IMPRISON those responsible for the cheating and fraud, nothign changes except taxpayers go broke, nations go broke and most of the world is impoverished to prop up a very few failures.

How many times have too big to fail banks been bailed out of failed positions - remember the Latin American loans in the 70's?  Undercover Fed bailout.  Continued in varied forms to this day.

Colonel Klink's picture

We shystered some folks.

f16hoser's picture

Shh, repeat after me: "Derivatives..."

disabledvet's picture

Best article ever written here PERIOD.


You have to allow the bankruptcy process to unfold otherwise the Banksters have you BY THE SHORT ONES.


This is why I advocate for an IMMEDIATE Bank Nationalization in Greece.  "You have to find out what the risk is first" otherwise you get an asset grab and EVERYBODY is toast.


This was JP Morgan's "great play" during the Knickerbocker crisis.  He had all the gold so that forced all the other Banks to open their books...thus restoring confidence to "the system" was able to be done.


This was with ZERO Government intervention and GOLD money no less!


Draghi is playing with Monopoly Money and he is leading Europe to financial RUIN in my view.


The lack of political will vis a vis Putin (crazy "sanctions regime") has CRUSHED the EU.


Colossal foreign policy blunder in my view but "too late now."


Might get some type of Baltic "customs union" to ditch the euro inflation once and for all.


Wouldn't be the first time.

Hanseatic League was around and doing fine almost a thousand years ago.

stocktivity's picture

It's making more and more sense now why Russia and China are buying gold

RaceToTheBottom's picture

Bank Nationalisation has its risks but as we are seeing, not nationalising them also has risks.

numapepi's picture

This article points out a theme of mine... that our economy has been flipped on it's head. Instead of Banks supporting our economy they are being supported by our economy. Like a tumor...

Our economy has cancer.


Pinche Caballero's picture

That's an excellent point, numapepi. I had to log in just to up vote you.

Our economy has been flipped on it's head.

Instead of __________ supporting our economy they are being supported by our economy. Our economy has cancer, alright, and it has metastasized.

1. .gov
2. banks
3. FSA
4. health insurance vis-a-vis Obamacare
5. MIC
6. Universities / student loans

The list goes on, and on. Until it doesn't, anymore.

numapepi's picture

Thank you!

Clearly you understand the point I was making Pinche. You elaboration exactly hits the mark.

cynicalskeptic's picture

The financial sector SHOULD exist to allocate capital efficiently to PRODUCTIVE enterprises.  In a world where 'money' cannot be created out of thin air, WEALTH is created by ADDING VALUE ins some manner - through the exertion of LABOR.  Ore is mined, smelted into metal, metal turned into goods... grain is grown, milled into flour, baked into bread... trees are felled, turned into lumber and made into houses or other goods....   How do banks 'add value'?   They store wealth and lend out the wealth that in times past was created by the labor of others.

Fifty years ago the financial sector represented 8%  of the US GDP - today it's over 40%.   When the financial sector can obtain capital at NO COST, it has an unfair advantage in being able to buy ANYTHING and manipulate markets - stealing the wealth created by others through real exertion of labor.  The financial sector - which USED to be 'overhead' in support of PRODUCTIVE endeavors - has morphed into an all consuming parasite.  Because ultimately, without PRODUCTIVE endeavors that create GOODS, an economy collapses completely.

capital_anarchist's picture

+ 1000. I was a CPA early in my career. Couldn't live with myself knowing I was earning a living off of idiotic complex GOV regs. Siphoning off wealth of small businesses got to me. The primary partner at the time almost fired me for helping people understand the tax code so they could do more of it themselves. The industry exists to feed the overloads and gets rewarded on the backs of small businesses.

Heavy's picture

Remain Calm


Kill the bonds!

spinone's picture

Because war. You think the little guy loses with money printing, see how he makes out in a shooting war.

litemine's picture

ll depends on which way your weapon is pointed.  If the War is out of your country say "HELL NO, I won't Go".

Remember, the truth is, it's what you leave  for your Children.

gswifty's picture

What the Jew-bankers really fear this year is the Shimitah that is upon them and the jubilee that is supposed to bring. What's a 100 trillion bond bubble bursting compared to God's wrath and condemnation? Bit of a dilemma me thinks. Lol

lesterbegood's picture

Perhaps what terrifies the banksters more is people waking up to the fact that there is no lawful debt because there is no lawful loans, or lawful currency.


capltd's picture

Why would banks take a haircut when they have QE to reimburse them 100% for their bad loans?

kchrisc's picture

Guillotines. The only debt restructuring that matters.

The banksters need to repay us.

flash338's picture

Guillotines would make for one hell of a hair cut!!

Cynicles's picture

Bastille Day is merely spoken in French. The event transcends all language.

Gab Timov's picture

Any company selling guillotines, pitchforks, torches, and rope is going to make a killing, when the post bankist collapse chaos begins.

kchrisc's picture

"Any company selling guillotines, pitchforks, torches, and rope is going to make a killing, when the post bankist collapse chaos begins."

Ironically such a company won't be able to do an IPO, for obvious reasons. LOL

The banksters need to repay us.

LawsofPhysics's picture

Man. I remember this article from 2010.

litemine's picture

Did it change? Some newbe's reading this for the first Time and it is give credit to the OP.

silentsock's picture

Actually, I believe they post it a couple of times per month, just change a few words around, and sometimes give it a different title. :)

Buck Johnson's picture

Yep he does.  What he doesn't realize is that the court or whatever institution has to agree their is a default, and they won't even the ones losing money won't because they are afraid of the whole system coming apart.