As ECB Finds Defaulted Bonds To Be Ineligible Collateral, Bundesbank Is Stuck Holding The Defaulted Greek Bag

Tyler Durden's picture


Yesterday following the S&P announcement of the Greek 'selective default', we had one simple question to the ECB:

Today we get the answer. From Reuters:

The European Central Bank said on Tuesday it was temporarily suspending the eligibility of Greek bonds for use as collateral in its funding operations and that national central banks would have to provide banks with liquidity using an emergency measure. The move came after ratings agency Standard & Poor's cut Greece's long-term ratings to 'selective default' after Athens launched a bond swap to lighten its debt burden.


The ECB requires guarantees in the form of eligible collateral from all banks that seek central bank funds in its lending operations.


In anticipation of such downgrades following a second Greek bailout, the euro zone and ECB had struck a deal whereby Greece would receive 35 billion euros worth of support from the EFSF, the bloc's rescue fund, which it would pass to the ECB as a contingency payment so that the central bank could keep accepting Greek bonds and other assets underwritten by Athens in its lending operations.


However, this support measure has not yet been activated. The timing is particularly awkward for the ECB, coming just a day before its eagerly-awaited second, and expected to be final, offering of 3-year loans - a major crisis-fighting policy tool.

But before one gets all mushy at this shocking demonstration of fiduciary responsibility, let's not forget that in Europe it is all about perpetuating the Ponzi by all means necessary. While the ECB itself can't swap Greek bonds to cash any more, and by implication all other defaulted bonds - which is useful to know as it gives us a lower bound to eligible collateral: remember when ECB collateral had to be A-rated? - the ECB will still allow national central banks, which are chain-linked in funding via BUBA via TARGET2, to finance Greece.

The ECB said national central banks could provide liquidity using so-called "emergency liquidity assistance" (ELA) until the 35-billion-euro collateral enhancement scheme is activated, at which point Greek bonds would again be eligible in principle.


"This is expected to take place by mid-March 2012," the ECB said in a statement.


The ELA is effectively underwritten by the states in which it is extended, putting more pressure on the finances of euro zone countries whose budgets are already strained.


The issue is vital because Greek and Cypriot banks would almost certainly go bust if their central bank funding was withdrawn. Other banks in countries like France also own large chunks of Greek debt, meaning they too would face major financing issues if their Greek assets suddenly become unusable at the ECB.


"Via ELA, the Greek central bank is allowed to accept collateral that is not eligible in normal ECB operations," said Commerzbank economist Michael Schubert.


That the euro zone's deal makers and the ECB did not foresee the potential flaw in the collateral plan brought about by the 35-billion-euro support scheme not being activated in time is nonetheless likely to leave some with red faces.


The central bank estimates that there is roughly 40 billion euros of sovereign and other types of bonds underwritten by Greece being used to get ECB funding.


Greek banks account for a large portion of that but those in Cyprus and other parts of the euro zone such as France also have sizeable Greek holdings meaning their governments will also come with the use of the emergency liquidity assistance.


"The implementation of collateral enhancement was too slow, they should do it quicker, but that did not happen," said Schubert. "We do not know what they'll accept as collateral, but the spirit of emergency liquidity assistance is to bridge short-term liquidity squeeze, so in principle it is the ideal instrument."

In other words: the Nationa Bank of Greece suddenly finds itself without its ECB lifeline, but with a Eurosystem Bank backstop. Which means that the Bundesbank is about to be dragged down kicking and screaming into funding Europe's insolvent experiment even more, a step we predicted would happen months ago, and a step we believe that Germany will not be too delighted to tolerate once it figures out how the ECB just stuck it with the bill...

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Tue, 02/28/2012 - 08:27 | 2203189 maxmad
maxmad's picture

Default, Bitchez!

Tue, 02/28/2012 - 08:39 | 2203197 maxmad
maxmad's picture

 "Germany will not be too delighted to tolerate once it figures out how the ECB just stuck it with the bill..."


Thank goodness Germany's getting stuck with the bill and not the US taxpayers!  /sarc

Tue, 02/28/2012 - 08:43 | 2203219 eddiebe
eddiebe's picture

No,no,no max, don't call it that!

Tue, 02/28/2012 - 08:49 | 2203233 maxmad
maxmad's picture

call it as I see it! 

Tue, 02/28/2012 - 09:05 | 2203267 EnglishMajor
EnglishMajor's picture

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."

-Napoleon Bonaparte

Tue, 02/28/2012 - 10:28 | 2203622 JPM Hater001
JPM Hater001's picture

I have a car I drove into a tree.  Would you please use this as collateral...full purchase price new of course.

Tue, 02/28/2012 - 11:39 | 2203937 collon88
collon88's picture

Best summary of the Euroscamming I have seen.

Tue, 02/28/2012 - 08:49 | 2203234 sunnydays
sunnydays's picture

ECB should take over Ashten Kuchter job on "PUNKED"!  They can jump out and say ' HEY GERMANY WE JUST PUNKED YOU!'





Tue, 02/28/2012 - 08:53 | 2203244 Martin W
Martin W's picture

temporarily ....

Tue, 02/28/2012 - 08:27 | 2203190 Paul Thomason
Paul Thomason's picture

Worth a read at this time: Count Down To Market Peak Has Begun

Tue, 02/28/2012 - 08:28 | 2203193 mammoth mo
mammoth mo's picture

By any logic the run on banks and the freeze up would start now.


Too bad logic isn't in play.  We can all hope though.

Tue, 02/28/2012 - 09:03 | 2203264 bdc63
bdc63's picture

that's because everyone has learned a valuable lesson over the past 4 years ... if you do what you think is "logical", a central bank somewhere will come in and cut you off at the knees ....

Tue, 02/28/2012 - 10:57 | 2203744 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

A day in the future will come when CBs' actions are pointless.

Tue, 02/28/2012 - 08:31 | 2203195 Theta_Burn
Theta_Burn's picture

And ES up about 10pts

Anything pledged=investment grade these days.

Rally on


Tue, 02/28/2012 - 08:57 | 2203253 disabledvet
disabledvet's picture

At this point you have to wonder if the ELF's can be turned off. Germany seems to be exploring this option now. And yet Greece et al.."keep on keeping on." we had 'em here: TALF, TARP, HAMP, etc etc. I think it was minority leader McConnell who opined "at some point we're no longer in an emergency situation."

Tue, 02/28/2012 - 08:31 | 2203196 Irish66
Irish66's picture

Brain dead this morning, ELA stands for?

Tue, 02/28/2012 - 08:33 | 2203203 achmachat
achmachat's picture

emergency liquidity assistance

Tue, 02/28/2012 - 08:33 | 2203208 cossack55
cossack55's picture

Emergency Liquidity Assistance


Electric Light Aaachestra if your from Boston.

Tue, 02/28/2012 - 08:44 | 2203221 Reformed Sheep
Reformed Sheep's picture

Visual of Cliffy from Cheers... thx, made me smile.


Tue, 02/28/2012 - 09:18 | 2203302 bdc63
bdc63's picture

Epoch Ludicrous Absurdity

Tue, 02/28/2012 - 08:31 | 2203200 achmachat
achmachat's picture

Fight Club the way it was meant to be.

Tyler knows how to throw punches.

Tue, 02/28/2012 - 08:31 | 2203202 GeneMarchbanks
GeneMarchbanks's picture

'Which means that the Bundesbank is about to be dragged down kicking and screaming into funding Europe's insolvent experiment even more, a step we predicted would happen months ago, and a step we believe that Germany will not be too delighted to tolerate once it figures out how the ECB just stuck it with the bill...'

Bb has understood this all along but hasn't any alternative, meanwhile all it'll take now is an ousted Sarkozy and the experiment will be over in all but 'announcement'.

Tue, 02/28/2012 - 09:40 | 2203204 Zero Govt
Zero Govt's picture

Not all bankers toxic crap is equal ..according the ECB

..will junk dealer, Bubble Ben, be a bit more selective next time the bankrupt brats of WS come crying?

Meanwhile other CB's (Bank of England, Japan etc) are launching more rounds of Cash-4-Crap to help pawn for our destitute gambling junky bankers.

No doubt more signs of "recovery" we're all told to believe in and how brilliantly their 'solutions' worked in 2008, 2009, 2010 and 2011

Tue, 02/28/2012 - 08:33 | 2203205 wee-weed up
wee-weed up's picture

Cue toilet flushing sound in 3... 2... 1...

Tue, 02/28/2012 - 08:33 | 2203206 Tortfeasor
Tortfeasor's picture

It's the euro version of restaurant roulette!  Put everyone's government funding on one bill, then put each country's credit card in a hat.  The credit card that gets picked pays for the check.

Except Greece put in a bus ticket, Spain put in a train ticket, Portugal gave up a gift card to McDonalds, Ireland said "fuck you" and left, and France's mastercard is over the limit.   

Tue, 02/28/2012 - 08:44 | 2203222 The Swedish Chef
The Swedish Chef's picture

You forgot to mention that the Greek bus ticket was already used, the bus company has filed for bankrupcy, there was something scribbled across it and they had blown their nose with it...

Tue, 02/28/2012 - 08:41 | 2203207 slaughterer
slaughterer's picture

Weidmann is NOT happy.  I can hear him screaming curses like a teenage boy from across town.  "Die fickende Griecher.  Der Arschloch Mario.  Diese blöde S&P." usw.

Tue, 02/28/2012 - 11:14 | 2203805 Don Diego
Don Diego's picture

as I said before Germany barks but at they end they pay. The German populace must understand that their country is not sovereign as it is still occupied by the WWII victors.

Tue, 02/28/2012 - 08:34 | 2203209 samwell
samwell's picture

and its gone.

Tue, 02/28/2012 - 08:34 | 2203210 The Swedish Chef
The Swedish Chef's picture

When I first read about this in Spansih press I thought it would seriously hamper investor sentiment. Not a dent in the market... Seems like my LTRO bet will pan out. 


Collateral, bitchez!

Tue, 02/28/2012 - 08:38 | 2203216 slaughterer
slaughterer's picture

Amazing the number of contingency funds the EZ is pulling out of its hat like so many pieces of duck tape.   Pretty soon the whole system will be hanging together with some chewing gum and a few nervous smiles. 

Tue, 02/28/2012 - 08:47 | 2203228 GeneMarchbanks
GeneMarchbanks's picture

That seems common knowledge. The "system" was built on lies and deception from the get-go so the only possible addition is more of the same. The only thing that changes is perception, the facts stand outside unchanged.

Tue, 02/28/2012 - 09:19 | 2203304 irishlink
irishlink's picture

That description calls for a Banzai7 . I can totally visualise it!!

Tue, 02/28/2012 - 08:36 | 2203213 Josephine29
Josephine29's picture

The German banks are tied into this game and the Bundesbank knows it. This is illustreted well here in an article examining how strong Germany's position actually is.

It is always the banks is it not? Ironically the austerity hard (wo)man has perhaps the most to lose from a banking collapse as it would show that her economic edifice is by no means as strong as it might appear. Going forwards the question is can her exporters pay for the sins of her banks? To that question we do not know the answer yet. In a world of realpolitik you may already be seeing how Germany let an Italian be in control of the ECB and that her complaints may be a case of.


The lady doth protest too much, methinks


In short if this was a game of football we may not yet be even at half-time which is a great relief as an Englishmen  as what we want least of all is a penalty shoot-out……..

Tue, 02/28/2012 - 08:44 | 2203223 eddiebe
eddiebe's picture

Print bitchez!

Tue, 02/28/2012 - 08:48 | 2203229 Catullus
Catullus's picture

What deal was struck with the EFSF and the ECB to pay them in the event of Greek bond impairment? Is that like an OTC CDS on Greek debt that all participating countries "agreed" to?

Tue, 02/28/2012 - 08:49 | 2203230 _underscore
_underscore's picture

The buck well & truly stops with Germany, whatever it does the millstone of debt lands at its door, one way or another.

Tue, 02/28/2012 - 08:53 | 2203243 Reformed Sheep
Reformed Sheep's picture

Welcome to the European Union of Germanic Nations. Helluva mortgage, mind-you...


Tue, 02/28/2012 - 08:51 | 2203235 DutchDude
DutchDude's picture

Super Mario's: "Look! A three-headed monkey!"


Tue, 02/28/2012 - 08:51 | 2203236 orca
orca's picture

Well, at least the ECB gets to distribute all "profits" of said almost-defaulted and not for collateral eligible Greek bonds to the member states.

Tue, 02/28/2012 - 08:51 | 2203237 DavidC
DavidC's picture

And the market is still UP today?!

AND following this from the UK...

I'm losing all understanding of this now.

Tue, 02/28/2012 - 08:51 | 2203238 Vince Clortho
Vince Clortho's picture

Thank heaven for Greek Collateral.

Tue, 02/28/2012 - 08:55 | 2203251 Reformed Sheep
Reformed Sheep's picture

Thank "The Elysian Fields" for Greek collateral. 

Tue, 02/28/2012 - 08:52 | 2203239 Instant Wealth
Instant Wealth's picture

Target2 = clandestine financial H-bomb

Tue, 02/28/2012 - 08:53 | 2203240 shushup
shushup's picture

Great! This means the market will rally huge. This market loves bad news even more than good news.

Tue, 02/28/2012 - 08:53 | 2203241 tradewithdave
tradewithdave's picture

You know those action and adventure movies, the one where the is an elaborate vehicle chase maybe involving helicopters and lots of car crashes and the like.  Well, there's usually a section in the race where they go through a tunnel or are temporarily out of sight by going through a building or something and the observer (you and me in this case) loses site of what's happening for just a minute or so.

Well, that's where we are now.  It's always during that part of the scene that either the driver switches out with another driver or he jumps from the car onto the top of a moving train or whatever.  The point is, you get the action to a peak of excitement, then like any good magician, it's the other hand (the one you're not watching) that does the deal. 

Why do I get the distinct feeling that the real action is back at the Fed and it has to do with Germany's gold left over from WWII?  See you on the other side of the tunnel.

Tue, 02/28/2012 - 09:01 | 2203262 Vince Clortho
Vince Clortho's picture

1.  Car races into tunnel with briefcase full of Greek Collateral notes.

2. [?]

3.  Car emerges from tunnel with trunkload of Gold.

Tue, 02/28/2012 - 08:54 | 2203245 JennaChick
JennaChick's picture

An interesting commentary I read at Armada Markets website on EURCHF and SNB's reactions:

1). The closer EUR/CHF gets to the said 1.2000 floor (it's not a peg...thats different) the less the SNB will have to least in theory . How many here would add to their long positions at 1.2020?

2). If the floor is broken, so many stops would be triggered that the SNB would have to spend incalculable funds just to counteract the squeeze, and would have to bust their butts just to get the pair back to the 1.2000 floor.

3). The SNB is playing a very dangerous game, as they have left very little room between the existing rate and the floor. If we get a EUR shock (i.e. Greece blows up or CDS are activated etc..) the SNB will be caught between a rock and a hard place...with no room to wiggle.

4). The floor will not be raised. The SNB will however defend the 1.2000, because if they do or can, the EUR/CHF has the best chance to organically go higher, which will negate the need to defend a higher floor, which just would cost them even more.

5). The shorts are just Hedges and normal inflows, because thats the way things work.

Tue, 02/28/2012 - 09:00 | 2203259 Nussi34
Nussi34's picture

They just should bomb Greece and get it over with!

Tue, 02/28/2012 - 09:00 | 2203260 Tuffmug
Tuffmug's picture

Greek Bonds??? Greek Bonds??? We don't need no stinkin' Greek Bonds!!!

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