Coming Collateral Crunch Charted

Tyler Durden's picture

To better comprehend the chaos that is currently viciously circling in European funding markets, its critical to understand the difference between 'linear' collateral needs and the highly non-linear self-destroying re-pledging collateral crunch that is about to occur. Perry Mehrling, of INETeconomics, does a good job of explaining, in his chalkboard-style video, the three lending-based demands for collateral among the European banks and their central banks (Interbank, National Central Bank, and TARGET-2). He notes the IMF's proposed interjection might help to relieve the collateral crunch that we have been so actively discussing. However, these are all lending channels that rely simply on haircuts and specific collateral needs, what is being missed here is the much bigger problem of re-hypothecation (or re-pledging) of the collateral which leaves the considerably larger shadow-banking system facing a run on ever-decreasing piles of assets. So simply put we have a crunch in credit as increasing needs for collateral for 'pure' lending will be greatly exaggerated by the shrinking 'net' availability of collateral (as risk manager after risk manager tightens up their systemic risk criteria and reduce availability of funds for re-pledging). Put another way, while policy-makers focus on the big bazooka top-down, it is the smallest fund manager 'cog' in the chain of re-pledged collateral that will inevitably bring the system down.


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Newsboy's picture

Promises, promises, promises...

Where does it all end?

falak pema's picture

the profits in the Oligarch's pocket, the losses on the country BS. 

sqz's picture

Pretty charts, but:

0. IMF does not buy sovereign debt. It makes loans to sovereigns and with highest seniority. This idea has also been completely squelched by ECB head Draghi's most recent conference stating EZ NCB's will not be involved (think about it: it deliberately bypasses ECB's monetary system and European treaty).

1. Europe's collateral crunch is a lot larger than just sovereign debt. Moving this little bit around different balance sheets would change nothing. In fact, they risk undermining the currency directly (I do not mean mere devaluation).

2. Europe's crises are more than just a collateral crunch. Entire funding markets have dried up, most importantly unsecured lending. This is why there was a switch to collateralised lending in the first place and this is why intermediaries are facing the ECB and their NCBs (ELA etc).

3. It is even worse than above. Due to the total funding requirement in the EZ, it barely matters how much the ECB changes their eligible collateral requirement (which are already the widest of the majors), all the collateral that could be used to secure liquidity has been already.

4. This is a trust and confidence led crisis. That is, we are well past the point where these issues can be fixed by monetary solutions. The core problem are the EZ institutions and the fiscal plus structural policies that underpin the Euro currency.

5. There is plenty of liquidity available already both inside the banks (e.g. ECB deposits) and outside, though not enough once bad and encumbered collateral is taken into account in the banks, i.e. bank recaps are required too. The fact is that few are in interested in taking the risk of putting it directly to work within the Eurozone financial system which is causing the problem. This includes foreign funding, such as in USD.

In short, the core problems of the Eurozone are fiscal (banks, sovereign backstops) and structural (ECB, treaties). You cannot bailout such problems from outside the Eurozone. It would be as ridiculous as the world coming together to bailout the US during its subprime crisis. There are some problems that must be solved alone because they strike at the very heart of your existence and future.

economics1996's picture

So what has happened since 1971 as we prepare to march over the fiscal cliff of financial insolvency?

Since the complete transfer from a fiat currency the Dow Jones Industrial Average (DJIA) has increased 1,262% and the Gross Domestic Product (GDP) 1,233% using “nominal” numbers or numbers not adjusted for inflation. More or less in lock step as one would expect.

Total credit market debt owned has increased 2,902%, outstripping GDP growth by a factor of 2.35.
The Federal Reserve monetary base, (coins, paper money, and commercial banks’ reserves with the central bank) has increased 3,658%, outstripping GDP growth by a factor of 2.97.

The third central bank of the US will end its reign soon mired in inflation, corruption, and scandal

Gold, the traditional source of real monetary value, has increased 4,177%, outstripping GDP growth by a factor of 3.39.

economics1996's picture

Translation the haircut needs to be 43 cents on the dollar.

economics1996's picture

For the USA.  I don't know shit about Europe.

tom a taxpayer's picture

sqz - You hit the nail on the head. Truer words were never spoken:

"This is a trust and confidence led crisis. That is, we are well past the point where these issues can be fixed by monetary solutions. The core problem are the EZ institutions and the fiscal plus structural policies that underpin the Euro currency."

malek's picture

Aren't you confusing the trigger (lack of trust and confidence) with the cause (too much debt)?

AldoHux_IV's picture

I would say it's more of a crisis led by inherent design flaws of a monetary regime aided by incentives to over leverage thus making the system even more vulnerable to real life stresses (i.e. difference in fiscal regimes), thus it's a crisis of reality-- one where the flawed nature of the current monetary system is coming into question because it doesn't work when there are no proper checks and balances and only political career risk being the main driver behind decisions.

FinHits's picture

This is good for debtor nations: Germany,  Netherlands, Luxembourg, and Finland. According to FT Alphaville, their central banks have TARGET2 balances of €65 billion, €89 billion, €85 billion and €33 billion, respectively, for a total of €672 billion owed to the rest of the Eurozone central banks, including France (!).

If they can shift €200 billion to IMF, that is a much safer trade than keeping it within TARGET2.

sitenine's picture


4. This is a trust and confidence led crisis. That is, we are well past the point where these issues can be fixed by monetary solutions. The core problem are the EZ institutions and the fiscal plus structural policies that underpin the Euro currency.

With all due respect, and as great as that sounds, no.  This is a ponzi, fraud, and theft led crisis.  Get your head out of Buffett's ass please.

MolotovCockhead's picture

Yeah right. Let me eat your lunch first and I promise that I will let you eat my children's lunch, okay? How does that sound? Not very convincing eh?

Dre4dwolf's picture

It ends soon, I promise.


TruthHunter's picture

"It ends soon, I promise."

IT starts soon, promise or no promise...

ISEEIT's picture

With you, with me.

Small is the opposite of large.

Large = bad.

Get real.

Ron Paul.

johnu78's picture

It's going to end soon. That much is for sure!



riley martini's picture

 Jim Sinclair is calling for $4500 gold . I didn't see a time line though , before the euro implodes .

Global Hunter's picture

Who's Jim Sinclair?  Tell him I call $100 gold, mind you a dollar when gold hits that level will be enough to feed a family of 8 for a week.

NuYawkFrankie's picture

Wasnt he a wide-receiver for the Green Bay Packers back in the '85=86 season?


DosZap's picture

Global Hunter

Who's Jim Sinclair?

No one special, I think he's cousins with Cramer./sarc

fonestar's picture

Your dollar and its attendant cult is going to hell.  I will wipe my ass with it and then you can eat that for a week.

MolotovCockhead's picture

I will wipe my ass with it


Friendly advice to you. Do not use dollar bill as toilet paper!! Again, not with dollar bill. The reason? It's not water only mess yourself up, yack! Worthless fiat make high quality wall paper though

malek's picture

That is too stupid for a snarky reponse...

jbc77's picture

I suspect when the Euro collapse gold will plunge in the first days of the carnage. Obviously this will be the time to pounce depending how easy it is to procure physical. Could be one of those everything that isn't nailed down gets sold scenario. Or shit will get sold to satisy margin. At any rate hopefully some bargains will be found....

FlyPaper's picture

+1     Liquidity requirements will unwind the paper "gold" market at the point where the dominoes kick over.   If you have the ability to hold the gold, it'll go back up with the Bernanke express starts to print.

The question is: how far will the paper value of Gold fall before Central banks and other buyers step in and buy? 

dcb's picture

When you st5art to understand this, you start to understand that to have the debt destruction you need to make the ystem safer, you need to have deflation. The insqane focus on deflation being the root of all evil makes them unable to fix teh system. In theory you could print so much money that much of tyeh debt becomes real money, and then make sure they don't leverage up again. But I don't know how to do this. Please note, you also must add the minsky monent to your understanding of the problem, and incomes that can't support debt. the system is really designed to fail

Seasmoke's picture

they refuse to deflate.....thus it will be a great collapse

pineyard's picture

Come on ,,, STOP this fake pseudointellectual MUMBO JUMBO                                                               I dont have time to get pulled around by some fancy emperors Clothes                                              and it doesnt impress me either                                                                                                                                                   I believe in SIMPLE THINGS                                                                                                                                                                                                if IF money cannot be explained as that ...  its FAKE and not worth wasting time on

Global Hunter's picture

I'm fascinated by just how fake it is and how deep it goes

bugs_'s picture

It is so deep and so fake that even cynics have a challenge getting their heads around it.

Global Hunter's picture

children, the insane, most drug addicts and only a select few normal able bodied adults are able to understand

Nate H's picture

its not 'fake', its just disconnected from the productive capacity it was once supposed to track.  and marginal cost of energy now permanently (until things crack of course) going up -so productive capacity going down while debt going up - not good trends.

tarsubil's picture

Bills of legal tender not backed by precious metals are like radiators without coolant. There is nothing getting in the way of a meltdown.

Atomizer's picture

Chalkboard to eraser to hide devriatives BITCHEZES

Hedge Fund of One's picture

Sorry, but the accountant in me had to speak up: On the chalkboard, when the assets are transferred to IMF from the NCB, they should be drawn in the Assets side of the IMF not the Liabilities side of IMF. Correspondingly, with the assets transferred from NCB, Liabilities should be created on the NCB balance sheet to show that it would owe that amount to IMF. The Assets on the IMF balance sheet would be Liabilities of the NCB. Supposedly, the IMF would be funded by contributing entities, which would create Liabilities on the balance sheet of the IMF for the amounts owed to those contributors (the U.S. Fed?). And where would those contributors get the money? Create it from thin air?


Global Hunter's picture

sorry but the accountant in you is hurting my head, I really am walking around and living surrounded by absolute insanity

TheFourthStooge-ing's picture

The accountant in Hedge Fund of One speaks of archaic accountancy terms and practices from a bygone era of non-fictional accounting, when books had to balance and book entries were tied to reality.

Back then, what he speaks of would have mattered. However, modern accounting has made things much easier; you simply start with the results you want, and then work your way backwards, creating book entries which flow from the bottom line. Just think of it as creative writing, but with numbers instead of words.


DormRoom's picture

when 1:1 (double entry) relationships mutate into 1:M (rehypothecation entry) relationships you have a situation for a clusterfuck.


the great reset cometh.

TheFourthStooge-ing's picture

It's not just a clusterfuck. It's a global, daisychained clusterfuck. Further, rehypothecation means that each participant in said clusterfuck has multiple penises and dozens of cloacal orifices.


whoopsing's picture

So, that'a a multi-cloacal rehypothecated cluster-fuck. Captain, we are doomed

ViewfromUndertheBridge's picture

the new technology that has driven all this? ...Spreadsheets.

Hedge Fund of One's picture

That's why I started with "Sorry ..." I knew it would probably hurt. Great responses from all. lol

A Man without Qualities's picture


"And where would those contributors get the money? Create it from thin air?"

- yes, which is why this whole argument about costing the taxpayers is BS...


Pool Shark's picture



And what happens to the value of the taxpayer's dollar every time new ones are created from thin air?

Exactly; it costs the taxpayer via theft through inflation...


breezer1's picture

Think of all the fixed income people that you know who will be affected by this ' inflation' theft.

earleflorida's picture

they used to be incinerated, now their just electronicfied to bits  

Reese Bobby's picture

I'm no accountant but you are wrong.  The ECB is not on the blackboard but "Eurosystem Lending" is an ECB liability that becomes an IMF liability in this exercise.  The Banks "sovereign debt" assets are transferred as an asset to the IMF in return, and the other book entries are eliminated.  Again, I am not an accountant.

economics1996's picture

Somebody was paying attention in class.

RiverRoad's picture

Exactly.  Created from thin air and the old (off the books) foreign aid shell game.  Liabilities?  These guys  still owe us money from WW2 war debts!!