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The ECB & Greece - Lender Of Last Retort Attitude Must Stop
Via Peter Tchir of TF Market Advisors,
The ECB seems to be quite happy to comment on Greece, and most of the comments seem to say that Greece isn’t doing their part. Well, what about the ECB? What have they been doing for Greece? So far, not very much and I think they need to start to play nicely with their holdings. If the ECB just plays nicely, at no cost to the ECB, the situation in Greece would improve quickly and dramatically. The ECB must go from being a lender of last retort to a bona fide contributor to Greece and a true lender of last resort.
The ECB’s Current Holdings:
So the ECB currently holds almost €52 billion of Greek fixed rate debt (from Bloomberg data).
€24 billion of that debt comes due in the next 3 years, right when Greece needs all the help it can get to turn around the economy. I think about €10 billion of debt has already been repaid at par, including a whopping €4.6 billion in March. Before going further, just think about the current situation. The markets are on tenterhooks about whether Greece will receive €5.3 billion or not this month, and once again, most of that money is going right back to the ECB. It seems like a shockingly poor way to help Greece through its problems. Demanding payment at par, and forcing Greece to borrow that money so the ECB can book a profit, is just bizarre in my opinion.
The average coupon on the ECB’s holdings is 5.01%. So Greece is paying €2.6 billion in interest, on an annualized basis to the ECB.
If the ECB swapped their bonds for PSI bonds, which currently have a 2% rate of interest, the annual interest expense would drop to just over €1 billion. That is an annual savings of €1.5 billion! That is getting close to 1% of GDP at Greece’s current GDP run rate. What does the ECB care about the interest rate for? They aren’t mark to market. They borrow at whatever rate they set. Why not just switch to the PSI bonds and help Greece save that money?
The PSI bonds would also wipe out all the bond maturity payments Greece needs to make until 2023. They still owe the IMF money, but that is a separate and less odious story.
How much has the ECB booked in profits on the Greek bond positions?
The ECB started their bond purchases in May 2010. The program of buying Greek bonds was definitely over by June 2011 when we had the bailout summit, and the Greek 10 year bond was already trading at 55% of par.
So it is probably conservative to assume that we can look at the ECB portfolio of €60 billion as having being accumulated in December 2010 (some bonds bought before and some after).
That means they held €60 billion of bonds for 18 months. Assuming the 5% coupon on the remaining unmatured bonds, that is €4.5 of accrued (and paid) interest. So the ECB has booked €4.5 billion of income from holding Greek bonds. Even accounting any funding costs for the ECB, it is a big number of pure profit.
Why not just disgorge that money to Greece? Why not return it to Greece. Rather than demanding payment on near term redemptions, just give back the interest that has been earned? That €4.5 billion would be a huge shot in the arm of an economy that is struggling. Maybe that is too kind, but at least that much debt should be forgiven?
But that’s only part of the story. The GGB 6.1% bond maturing in 2015 is a good example. The ECB holds over €3 billion of the bond and it was the on the run 5 year at the time the crisis started in 2010. It is also right about the average maturity of the ECB’s holdings. In May of 2010 the bonds traded in the low 90’s. By June 2011 the bonds were in the low 80’s. It seems reasonable to assume that the average purchase price for this bond was in the high 80’s, let’s call it 87. Some shorter maturity bonds would have had a higher average cost, but some longer dated bonds would have had a lower average cost.
The ECB must have the actual details, but I don’t, so I will work under the assumption that the average price of the €60 billion was 87% of par. That is another €7.8 billion of potential profits that the ECB is sitting on. Some will have been realized already on the bonds that have been paid back. Since those were shorter dated, the reality is that almost none of this has been realized yet.
So unlike the €4.5 billion of interest which has been realized and could simply be returned to Greece, the unrealized gains couldn’t be. But there don’t need to get paid at par. If the ECB just received their “cost” there would be no loss. They would forego profits, but why does the ECB need such massive profits?
Let’s assume that the ECB rolled into new PSI bonds at cost (including the interest they have already received). Then the ECB could roll their remaining €52 billion of debt into only €39.6 billion of PSI debt (4.5 from interest and 7.8 from cost).
The ECB’s Holdings under a PSI conversion plan:
What a difference that would make for Greece. No borrowing money to pay back money for the next few years. Annual interest expense on ECB holdings would drop from €2.6 billion to less than €0.8 billion. That is meaningful by any standard.
What would the ECB lose? Nothing. This would just ensure that the ECB broke even on their Greek bond purchases. Is that too much to ask?
Maybe the ECB should “Ask not what Greece can do for you, but what you can do for Greece”?
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Greece doesn't need more loans, they need to default, exit the Euro, and reintroduce the Drachma. This has been the inevitable conclusion all along, and the faster they do it, the faster they'll get through that reset process.
Greece has already defaulted.
http://www.cnbc.com/id/46683364/Greece_Default_Is_Official_Insurance_Payouts_Triggered
That was just a little tickle of a default.
"No risk of that..."
http://www.youtube.com/watch?v=VJthLVZCgDI
http://www.youtube.com/watch?v=q7Z0L-NYFlE
No default...convert your EURO debt into Drachma and devalue (as needed)...For schedule look at Argentina!
Would you guys please stop and think.
1) The money owed is in Euros. You can't convert to Drachmas without creditor approval. Who would approve that?
2) There is no such thing as default. A declaration "we default!" can be ignored by creditors. There is no international bankruptcy court to expunge it. The creditors will shrug and continue to compound it and pass legislation to apply a garnishment to oil sent to Greece, perhaps in the form of a premium price. Argentina still owes the money. They are shut out of credit markets and are unravelling right now.
3) Greece can't escape the debt. No one can in a world of multinational lenders. The only imaginable way is the population of Greece would have to leave the country and the country cease to exist.
4) Another approach is to never run another deficit and never need to borrow money, for anything, ever again. Even that probably wont' work because creditors can confiscate exported goods to get paid the money they are owed.
What about the Iceland example?
"A declaration "we default!" can be ignored by creditors. There is no international bankruptcy court to expunge it. "
BZZZZZT wrong.
There is no international collection agency to FORCE it & collect.
It’s time for new world order. Global leaders need to implement serious economic reforms, with SAFE-GUARDS against this type of event in Greece written into global legislation. With all due respect, the Greek people do NOT understand the global banking system, and they need to realize that accepting the bailout is the ONLY way forward. The sooner they realize this, the sooner they set a precedent for creating global economic stability and a brighter future for all.
I have no idea how they survived in the stone age without a central bank.
If I remember my history (or maybe it was the Flintstones, either way) the first central banker was Allen Goldstone and he kept the interest rates on animal skins low to sell more wheels. Fire was later invented to burn him at the stake.
...Like accepting a baseball bat up your ass is the only way for you to get your MDB. Are you up for it?
@MillionDollarBonus_--I bet this is Tyler and co taking the piss. God bless.
Constitution banning what? Elections?
Correct redpill,but even doing that is not enough. They must reject socialism, the true reason they have had to borrow, and turn to a free market rule of law republic. Think that will happen?
Not willingly. But there's a small percentage chance that during the period of devaluation and readjustment that they realize their only way out is to not repeat their mistake of creating an unsustainable welfare state. Unfortunately I think that's a pretty small percentage, though.
They will "embrace" hardcore socialism, as it's "always the fault of the rich". Fucks sake, even this morning on Sky News, some striking public sector moron is telling me they are completely without fault - obviously ignoring the 40% growth rate in the UK public sector during the Blair/Brown years.
I know what you mean, it's bad for my hart when I hear they say stuff like that.
It even pisses me off more when I see those public servants at "work"
It has about the same chance as a non-Catholic being elected Pope and bears no longer shitting in the woods.
Too late. The relationship is over. Better to head to divorce court.
We've entered into a new era of extreme socialism. This trend is going to continue until it either collapses (roughly 4-5 years) or it ends in a giant war. Sad, very sad.
http://ericsprott.blogspot.ca/
How is this socialism? Socialism should be good for the people. This is only good for the banks
Greece may unintentionally be in the vanguard of freedom for the masses here.If their government has it's credit card revoked and has to LEARN to live within their means the result may inspire others to follow their lead.
And you are first in line to invest in Greece after that? I seriously doubt that. A bunch of neo nazis and communists now trying to mess things up even further.
while i agree greece mayn't need more loans, and default seems to be the result many predict...the article opened the view to a milder approach, possibly a way out for both sides---do any of the attending euhemerists believe the ECU would consider it? on the surface, it appears one of the more pragmatic solutions.
A discount? How about the ECB just stay the fuck out of the market altogether?
Amazing how the lender of last resort always seems to be the lender of first resort.
Whiskey Tango Foxtrot.
What Greece needs is currency whose value is 50% of the current currency. Throw in a few haircuts and Greece will be on the mend.
What they don't need is more debt.
Foxtrot Uniform Bravo Alpha Romeo
ECB: "Sure we will give you more rope to hang yourself, but before that, could you please bend over, I have a gift for you". GREECE DEFAULT, hell it can't get any worse..
Are you kidding? The only thing rewarding bond holders' risk taking is the coupon payment. If they forgive the interest, bond prices will adjust accordingly downwards. Sorry Tyler I didn't like this article. Financial responsibilities cannot be swept under the rug without consequences. Might as well just default and get it over with.
and...the 'markets' remain "screwed down tight"
If you rotate the 'E' in the Euro 90° to the right it becomes a pitchfork. Maybe ... that is the way to unite the europeans ... make the all miserable and make them poor, nothing unites like a common hatered.
Greece is the Weimar Republic at least politically.
Extreme political positions on both sides. Just waiting for a man to emerge and unite the people against the banks.
From there it will escalate and spread like wildfire across the continent. Bankers better prepare and start packing their bags. It's time.
Peter is sounding more desperate for a central planning fix instead of the one fix that will put an end to this madness....an outright default.
I think you are missing the bigger point here Peter, i might add your last few writings have been pretty bad, Mark Grant right now is the best contributer on ZH
You can give them as much interest back as you want, their economy is broken, they really produce nothing and their people have been abusing the system for decades. Its finally time to pay the piper, and they are broke
You can keep throwing money at them as has been done last 2 years, it has done nothing, their economy keeps getting worse
I agree. You lend somebody money and they don't pay you back - too bad, you took the risk, you suffer the loss. But it doesn't obligate you to lend that person more money. And also, the interest isn't 'profit' if you never get the principal back. Greece has proven that they're not credit-worthy. Best thing for them and all involved is just to accept that, deal with the consequences and move on.
Superb article and recommendations. Hope that Mario Draghi at the ECB is reading this!
Peter Tchir is one of the finest commentators to be featured on ZeroHedge.
Basically your article amounts to Eurobonding by ECB on Greece instead of current EUROSCAMMING.
OMG! Sue Greece?
I say let's first send them a angry email written IN CAPITALS FONT 16!!!!
We'll see who's laughing than!!!!
The only way Greece eventually increases productivity and starts working again is to let them slip to where they should be already...depression state. To continue to have Germany subsidize them ( as that is the only alternative and ECB funding is nothing but German subsisdation as outside investors will not be back in this century)
It seems like a shockingly poor way to help Greece through its problems. Demanding payment at par, and forcing Greece to borrow that money so the ECB can book a profit, is just bizarre in my opinion. -- Peter Tchir
The big banks are working with the international bankers to try to hold the Eurozone together, not for the benefit of Europe’s people, but for the use of the Eurozone for continuous collection on their high pressure political loans and as the puzzle piece to fit into world government which they would control.
What is good for the goose, the bank…
“Without the government money,” said Bloomberg in April of ‘09, “Goldman, Merrill Lynch & Co., Morgan Stanley, Deutsche Bank AG (literally German bank) and other firms could have become some of the biggest creditors in a bankruptcy filing by AIG, the world’s largest insurer, because of the billions in losses on subprime bonds and corporate debt…
Deutsche Bank, a global banking company and Germany's largest bank, is the largest private bank in the Eurozone; it is headed by Paul M. L. Achleitner, a former Vice President of Mergers & Acquisitions of Goldman Sachs & Co., New York, and partner of Goldman Sachs Group. He recently took over the reins from Josef Ackermann, designated by the NY Times last year as “the most powerful banker in Europe and, depending on whom you ask, possibly the most dangerous one, too.” Ackermann is the man who helped former ECB head Jean-Claude Trichet “shape Europe’s economic and financial future.”
…need not necessarily be good for the gander, the Greeks…
It was Ackermann, according to the Times last year who “has insisted that providing some sort of debt relief for Greece would be a huge mistake…
“European banks, including German ones like Deutsche Bank, hold many billions of euros in Greek government bonds, and the banks would lose big if those debts were restructured. For the moment, Europe’s solution for Greece is, essentially, Mr. Ackermann’s: more bailout money and more austerity — an approach that some economists say only buys time without offering any hope of recovery….” -- Deutsche Bank’s Chief Casts Long Shadow in Europe
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