European Banks Now Face Huge Margin Calls As ECB Collateral Crumbles

Tyler Durden's picture

In what could prove to be the most critical unintended consequence of the ECB's LTRO program, we note that as of last Friday the ECB has started to make very sizable margin calls on its credit-extensions to counterparties. While the hope was for any and every piece of lowly collateral to be lodged with the ECB in return for freshly printed money to spend on local government debt, perhaps the expectation of a truly virtuous circle of liquidity lifting all boats forever is crashing on the shores of reality. This 'Deposits Related to Margin Calls' line item on the ECB's balance sheet will likely now become the most-watched 'indicator' of stress as we note the dramatic acceleration from an average well under EUR200 million to well over EUR17 billion since the LTRO began. The rapid deterioration in collateral asset quality is extremely worrisome (GGBs? European financial sub debt? Papandreou's Kebab Shop unsecured 2nd lien notes?) as it forces the banks who took the collateralized loans to come up with more 'precious' cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets - to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle - especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.



This huge increase in margin calls can only further exacerbate the stigma attached to LTRO-facing banks - and as we noted this morning (somewhat presciently) both the LTRO-Stigma-trade, that we created, and the potential for MtM losses on the carry-trades that LTRO 'cash' was put to work in could indeed start a vicious circle in European financials, just as everyone thought it was safe to dip a toe back in the risk pool.


What should also start to worry the Germans is the fact a 37x levered hedge-fund central bank with EUR3 trillion balance sheet that has extended credit in a 'risk-managed' approach on what appears to be an ever dwindling supply of performing collateral is starting to see dramatic 'gaps' in its asset-liability exposure (but rest assured Bernanke told us that our FX Swaps are safe as houses).


One last point should be noted - the hopes of an LTRO3 or some such are surely now out of the window as clearly banks have run dry of any and all reasonable collateral or can the sovereign bonds purchased using LTRO1 and LTRO2 funds be lodged once again in a rehypothecated miasma circling the drain?

Charts: Bloomberg

(h/t WallStreetMane)

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chump666's picture

And the Hedge Funds are going to pull the pin on the rest of the PIIGS (rumor Portugal bonds have been dumped by hedge funds).

Cue the FED massive swaps in the next few days.    This whole system is becoming unstable.  Gold bugs rejoice, safe haven flows are coming in, looks like oil is bid too.  Equities...brutal selling and volatility.

Thomas Jefferson's picture

Doom.  Its whats for dinner and the menu is long.

SAT 800's picture

Bernanke says FX swaps "safe as houses"; bha, haa, haa, haa. snicker-snicker. The Euro; the little dollar that almost could, almost could, almoost coouuld, puff and chugg its way up the hill; almost. then it stopped and all the steam ran out in fizzles and drizzles and all the kings men and all the kings horses couldn't put it right aygain. Ol, well. The works of man are temporary and often tinged with humor.

knukles's picture

"safe as houses"
Hah ha ha ha haha hah haha ha ha
Best get the White House working on this one.

New meaning to underwater lenders.
Hah ha ha ha ah ahhaha ha ha ha

francis_sawyer's picture

"safe as houses"??

You mean those "subprime is contained" houses?

Thamesford's picture

Swap Schmop! What about Bernanke's reverse repos with the banks by holding MBS as collateral?

Thank goodness interest rates are going to stay low for the long term...


morning_glory's picture

Aren't the ECB basically taking the same punt as MF Global?

SAT 800's picture

Yes, they're the clean up team in that league; going to be a bit messy, me thinks.

eigenvalue's picture

They can lower the collateral standard once again. Problem solved...

malek's picture

Exactly. Still way left to go lower...

LowProfile's picture

So that means you've been short gold what, 4 years now?

I feel sorry for your rectum.

disabledvet's picture

how's shorting all those debt markets treatin' ya then?

prains's picture



talk - action = shit  


it's real simple math, even you can put this one together. show us the math. not the accounting.

Ras Bongo's picture

Why in the world would Draghi increased the collateral requirements? It would be like shooting itself in the face....Or maybe that's the whole purpose?

Acet's picture

It's not that Draghi increased the collateral requirements, it's that due to it's dubious quality, the collateral parked at the ECB has gone down in value triggering margin calls to make up for the shortfall.

If you start accepting in all kinds of junk from banks as collateral, it's bound to happen that some of it doesn't hold its value.


StychoKiller's picture

Used condoms really having a tough time finding buyers in the marketplace...

HurricaneSeason's picture

20% of condoms in Florida are empty and 25% are underwater.

Thamesford's picture

are they fixer uppers or upper fixers? Messy business!

If you avoid them is that extending and pretending?

Caviar Emptor's picture

Just shred the collateral, replace it with an IOU from Ben. Poof! Problem gone. 

That was easy

Dubaibanker's picture

I love the smell of Napalm in the morning...calling the tops in the markets this week of March 2012....With results of Q1 due in April and elections in US, India, Russia et al (40 countries in 12 months, I am told) Govts will be forced to spend more while business strategisation for the remainder of 2012, post bonus bonanza in Feb 12, will slow down the corporations and printing presses globally...See China for slowest growth in 11 years and India for 6.1pct, slowest in 7 quarters...expect more of the same in coming months. Banks force closures whether due to subprime in 2008 to 2010, Greece and Portugal in 2011/12 and slow GDP growth of India/China in 2012 and 2013 or high inflation due to oil or Iranian hyberbole/sanctions along with FATCA of 2012/13 or impending and current 'defaults' in Greece, Dubai, India etc. If banks slow down further, then businesses surely have to follow!

Dr Zaius's picture

Oh come on now.  Next you'll be telling me this isn't all priced in.

Caviar Emptor's picture

Modest proposal: Call Alan Stanford! (excuse me SIR Alan Stanford) He'll know what to do!!

Takes a Ponzi artist to fix the plumbing in the house of Ponzi, eh? 


CuttingEdge's picture

No need for Alan Stanford when you have the odd vampire squid bank to ponzify your debt:


Just amazes me that Papademos di such a great job at hiding the Greek's problems ten years ago as head of their central bank (former GS - expert training), but is failing miseraably now.

JR's picture

I liked this line: “the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs,” which I believe to be true. Goldman Sachs and the Fed have taken the trust out of banking while placing the blame for the lurid situations they create on those who still believe in the legitimacy of the developed world’s financial system. Third world corruption that exacerbates poverty now is structured into the laws and policy that define the economic system shaping the current form of globalization. Hence, the vindication of GS's criminality in Bloomberg's play of the story you link that begins:

Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start.

“On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

“Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.

“’The Goldman Sachs deal is a very sexy story between two sinners,’ Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.

“Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed. Harvard University, Alabama’s Jefferson County and the German city of Pforzheim all have found themselves on the losing end of the one-of-a-kind private deals typically pitched to them by securities firms as means to improve their finances…”

Should the nimble Goldman with its KGB tactics continue to run roughshod over the world’s economies through control of the New York Federal Reserve Bank and the  issue and control of the world’s reserve currency, day to day living around the world will grow ever more painful as the corruption affects all lives and standards of living.

francis_sawyer's picture

Everyone knows you don't serve rabbit with a tosased salad, you serve wild turkey surprise...

Piranhanoia's picture

Isn't "breach of fiduciary duties" still a valid reason to unwind?   That was old law, sorry,  don't know what I was thinking.

Banksters's picture

Change the rules, problem solved... So sayeth the masters of the fiat realm.

yogibear's picture

The Euro was toast from the start.  It just took a while to prove it. It's what happens when you run out of other peoples money.

Eventually Japan and the US will get a wakeup call as well. Much of the Japanese debt is owed internally. The US owes to everyone outside it's borders. Next, the US debt ceiling being hit again.  The US won't change it's ways until it's force to be responsible by the rest of the world.

LowProfile's picture

Actually, the euro will survive. They MTM their assets, one of which is...  Gold.

So it will take a major beating, but it won't go to zero.

steve from virginia's picture


Hmmm ... more likely the Euro-nation central banks have leased all their gold. Euro is backed w/ lies and more lies ...

steve from virginia's picture


Hmmm ... more likely the Euro-nation central banks have leased all their gold. Euro is backed w/ lies and more lies ...

WoodMizer's picture

No worries the, metaphorical can just landed in the ditch, the Bernak can fix it QEazy

Tune in next month as the clusterfuck spreads to the new world, and santorum reigns from the sky.

I am a Man I am Forty's picture

hope everyone has some dry powder

yogibear's picture

The Euro was toast from the start.  It just took a while to prove it. It's what happens when you run out of other peoples money.

Eventually Japan and the US will get a wakeup call as well. Much of the Japanese debt is owed internally. The US owes to everyone outside it's borders. Next, the US debt ceiling being hit again.  The US won't change it's ways until it's force to be responsible by the rest of the world.

China and other creditors, it's time to ask Obama for keys to the White House.


wee-weed up's picture

They can have Obama (please, take him!) but the White House is ours!

j0nx's picture

Better get used to him because he aint going anywhere for another 4.5 years. GOP is in disarray and none of the current crop of clowns can beat him in November (besides RP whose own party hides him in the cellar and openly calls him the crazy uncle) and believe me that is REALLY saying something about the GOP that they have nobody on their bench that can beat a ridiculous weakling President like Obama. Sad days for the people of this once great country. And the most sad part is that the people don't really seem to care too much. Some tranny in Ohio was told he/she couldn't get ladies night drinks and the next day all the queers and trannies had mobilized to protest this 'act of injustice'. Yet you can't get hardly anyone off their ass to protest the fact that our food and gas have doubled in the past 2 years, UE is still easily in the mid double digits, or that bankers seem to own our government. The people of this country are living an idiocracy style existence. I'm disgusted with my fellow Americans for letting ridiculous liberals and political correctness ruin us.

wee-weed up's picture

j0nx said...

and believe me that is REALLY saying something about the GOP that they have nobody on their bench that can beat a ridiculous weakling President like Obama.


When one considers how the sycophant MSM is in Obama's back pocket, what you say is not surprising. But the GOP won't defeat Obama - conservatives will!

FischerBlack's picture

So, Draghi calls up European Bank X and says, "Dude you need to cough up Y Euros because your shitty collateral is getting shittier by the minute." Banker says, "I understand. But if I have to cough up Y millions, it really won't be possible to hide our insolvency anymore. Cash flow doesn't lie, of course, and this will lead to a run on the bank, and then, obviously, the system itself is at risk." Draghi pauses, "Never mind the margin call, amico. I'm such an idiot. I was using 2008 math, I forgot we're using the New Math now. Someone really needs to update these outdated HP calculators. There's only one operation now -- addition. And only one number to available to add -- par." Banker is serious, "And that's the way it must stay...


True story.

StychoKiller's picture

I believes ya!  WHY would a Delta lie to me?

Seasmoke's picture

i dont think we get out of march without a major event

3FrenchHens's picture

@seasmoke Agree on major event. seems like quiet calm before storm. Originating Europe, shows up US ?  We were born for this.

lolmao500's picture

So now the ECB is starting to mark-to-market their assets instead of mark-to-rainbow?? BS.

lineskis's picture

Yeah, I'm pretty sure the ECB will find (or vote) an accounting gimmick shortly so they can mark-to-rainbow. And all will be well in wonderland...

FischerBlack's picture

Tyler, what do you think it would take to get a copy of the Manhattan Madam's client list? If Anonymous had some sense, that's the kind of thing they'd be going for. Is it just too much to wish for?

Unprepared's picture

Go to sleep Tyler. The Algos are.

Mike Cowan's picture

What is the interest on a Greek Bond now? A 1000%?

Calmyourself's picture

One year was 1006% last time I checked 3/5/12

Jayda1850's picture

The whole reason for the LTRO was that the ECB could not buy sovereign debt outright, though they did so on a limited basis with the SMP, so they lent money to banks hoping they would instead. Now that the ECB has almost no one with enough collateral to lend to, how long before the ECB, not only has to take a loss on these LTRO loans, but has to massively expand their SMP program to keep sovereign yields down?

A Man without Qualities's picture

I agree with most of what you say, but remember that the LTRO was really no more than a replacement for the collapsed private sector repo market.  What had been a well-functioning market was totally broken down, because banks had lost faith in both the counterparty and the collateral.  The 3 year tenor stuff was a smokescreen, given that repo rates were variable and there are margin calls, so you can't say you know the cost or the amount.  The way the banks tried to sell it as a version of QE was disingenuous at best - there has been no rate/ credit risk transfer to the ECB.  

However, they will only take a loss if one of the counterparties does an MF Global and the ECB decides to play as tough as JP Morgan did.  In reality, the ECB has enough channels for lending to the banks that they can make sure there are no margin call crises.  I am doubtful the ECB is ever going to step up the SMP again - they seem to have decided it was a bad decision by JCT - but I may be proved wrong.