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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PORTA PORTA's picture

Commerzbank has reported a loss for the July-to-September quarter after taking further writedowns on Greek debt.

Germany's second largest bank reported a third-quarter net loss of 687m euros ($949m, £593m), compared with a 113m-euro profit a year ago.

The bank - which is 25%-owned by the German government - took a 798m-euro hit on its Greek assets.

France's biggest bank BNP Paribas revealed a 72% drop in profits, to to 541m euros, after cutting its exposure to sovereign debt.

Franco-Belgian bank Dexia and US broker MF Global have both collapsed in the past month due to exposure to the crisis.


Greece is the spark
Does Europe really need to fear a Greek default? From an isolated non-Greek perspective, not really since the total exposure to Greece is limited in a pan-European perspective. Greece is expected to default, either in an orderly fashion or in chaos. The largest risks lie within the system-critical banks which hold additional PIIGS debt, excluding Greece. BNP Paribas has an additional Euro 32bn in non-Greek PIIGS sovereign debt exposure and the corresponding number for Commerzbank is Euro 14bn.

Italy is the key
The largest risk by far is in Italian government debt. Earlier this week Moody’s downgraded its credit rating on Italy and the pressure is immense. The largest holders of Italian government debt are unsurprisingly Italian banks, primarily Intesa Sanpaolo and Unicredit which hold Euro 29bn and 24bn respectively (see chart 2). However, BNP Paribas holds in excess of Euro 12bn in Italian government bonds and French financial institutions collectively are believed to have exposure to Italy amounting to about 20 percent of Italian GDP.


Plausible outcomes and who will pay?
Mismanagement of this crisis will lead to extensive collateral damage and there are no winners in this process. The EBA estimates a capital shortfall of Euro 200bn in the European banking system. This number should be viewed with caution however, given the fact that the EBA has been in charge of the past lax stress tests of Europe’s banks so it might be higher. The banks’ investments in sovereign bonds are not an investment decision but rather a liquidity decision. One has to understand that government bond holdings are an integral part of banks’ balance sheets - see the theme “Banking time bomb…”. So, if sovereign bonds go from “no risk” to “risk” we are looking at a regime shift in the balance sheet composition of all financial institutions and large capital increases will be required. This will inevitably mean that all capital requirement discussions will be obsolete and banking sector regulators will have to go back to the drawing board in Basel. A joint global bank recapitalisation programme looks more likely for each day that passes.

Impact  of a possible Greek exit  from the EMU, 16 ??????????? 2012



Sandmann's picture


Schauble has The Answer ! Imposing heavier taxation on Soldiers. The brilliance of this move should not be underestimated. Politicians have increased their pay and allowances, Corporate bosses and Bankers are doing fine; Greece is an SIV to fund the Banks; and to help pay for it all - Soldiers are to be taxed

PORTA PORTA's picture

also read and weep.

Letter by the HEad of Greek Stats to head of Troika, Paul Thomsen - CONFINDENTIAL !!

plz comment! lol


Sandmann's picture

It is a lovely letter. Greek seems a very confusing language for legislators and probably accounts for their Circumlocutions and Obscurantism. Maybe the legislation should be imposed by the Greek President, he no doubt has emergency powers. Anyway, it is clear that they are masters of Sophistry and should be allowed to take their time over legislation and be very thorough.......if they want to default they can ask for Food Parcels

rupeshpatel's picture

Barcap view on recent correction:

“The correction likely reflects concerns about the Greek PSI [private sector involvement], Chinese growth and high oil prices. But these concerns are not new and, so far, they are more likely to reflect profit-taking than a fundamentally driven repricing of risk”.

what planet do these f8cking monkeys live on?

rupesh patel



youngman's picture

here are some thoughts of the morning....

Germany and France are selling bonds...both have elections coming up....good or bad time to buy..add in the greece tell gold...or paper ......easy one for me...but the paper will sell....and at a good BTC...

USA Corporations all have cash over seas.....where is it and is it safe....????  If I was a CFO I would start to wonder.....maybe bring it on home and paying the toll might not be too bad of an idea right now....hmmmmmmm

hardcleareye's picture

Good point, now that you raise the question, I too wonder were the Corps are stachin' their cash....  something to contemplate while I do my bikrim class this morning, 90 min of ass kickin yoga in a 105 deg room...

Acet's picture

I have the solution for all this:

- The ECB can start rehypotecating to other central banks the collateral they have for the money they loaned

After all, what could possibly go wrong!???

rupeshpatel's picture

market seems to have stabilised .. will we see further sell off later today?

ive been short in S I Z E .. for 3 months .. and the rally has rolled me over .. i need a CRASH or im screwed!


Comay Mierda's picture

The bernank is fueling up his helicopter.

Moneyswirth's picture

Who the hell is this woman chattering on Bloomberg TV right now.  Holy fuck.....    S. T. F. U.  



Olympia's picture

Global Debt Crisis

The greatest private fraud of human history.
Who are the great fraudsters who are becoming the murderers of the human kind? How does the economy "illness" threaten Democracy and the freedom of people?

By knowing what happened in indebted Greece, where loan sharks created “bubbles” and the current inhuman debt, one can understand the inhuman plan in total ...understand where this plan started just to bring all states at the same end ...understand how this type of plans are established...


crawl's picture

This is definitely a worrisome condition for many banks. Perhaps too many banks assumed the ECB would never judge let alone MtM those pledged securities.

Maybe the ECB will revisit their requirement to have decent collateral and close their eyes to the collateral in their vault, all in the name of avoiding a fall into the abyss.

Solid Gold Bubble's picture

looks like "gg" for the GGBs. 1102% and soaring...

Frozen IcQb's picture

"a truly virtuous circle of liquidity lifting all boats forever is crashing on the shores of reality"

That is so beautiful that I think I'm going to cry!

cherry picker's picture

I would like to know, as I am ignorant of these things, would these banks be in this much trouble if they were not in the derivative business? Or countries?

Why the hell are countries and banks playing around with financial instruments no one understands and seem to be only profitable for the sellers of these things until they have to pay?

This is beyond common sense and the people who suffer have no say in any of this garbage.

This will not end well.  Maybe not tomorrow, but this year there will be a lot of problems and Iran is just a diversion they hope to focus the worlds attention on to take the heat away from themselves.

The people of Greece have nothing to lose by getting a new government and telling the people clamoring for their billions to go to hell.

Element's picture

When people don't get paid, extend and pretend ends.

This was 100% obvious when USSA mark-to-make-believe first started

As the recession deepens people aren't gonna get paid.

Printing simply isn't going to cut it.

When people don't get paid demand will plunge.

There ain't no pretending left at that point.

Chump's picture

Spot on.  Nothing will happen until people are hungry.  But when that happens, watch out.  Utter chaos will be the new status quo.

i-dog's picture

'Ordo ab Chao' ... they're counting on it (and planned for it).

Chump's picture

No doubt.

Your avatar reminds me of happier days.

Lost Wages's picture

Bank runs, bitchez.

cherry picker's picture

If 47 million are on food stamps, not including welfare and unemployment recipients, that is basically the taxes plus of a simlar number of people who are still employed isn't it?

So who is funding the war machine, government and all of its byproducts such as road building, education, police, medical?  Only 50 million workers?

Doesn't make sense does it?

Monedas's picture

Income comes from expanding the debt.....taxes are just there to direct consumption and dampen irrational exuberance (bitch slap) !  Monedas  2012    Hoarders don't need sleeping pills and wake up curious to see the latest fuck up ! "Let them entertain me !"...M.

miker's picture

Much ado about nothing.  The ECB lent all this money to save the banks and the sovereigns.  It would make no sense for them to call it back, in any form.  Normally Tyler has some good, thought provoking posts but this one is poor.  Looks like a lot of lemmings on ZH took it all in.

Chump's picture

What you say would make sense if this article weren't centered around the fact that the ECB is making these margin calls.

Baboomba's picture

Is this in millions or billions of Euros? or indexed to something, ratio?

blindman's picture
George Washington Resembling Chicken McNugget Sold For $8,100
George Carlin: Death Penalty for Bankers
Posted on March 7, 2012 by maxkeiser
06 March 2012
The Failure of the Current Banking Model and the Deliberate Mispricing of Risk For Personal Gain

Propaganda Wars : Our Version – Risk Weighted Lies. 1
By Golem XIV
February 28, 2012
"What scares the banks is any criticism that goes beyond claims of greed or fraud or even incompetence, and instead questions the system itself. The sanctity and perfection of the system and its right to ‘regulate’ itself, is what they are totally committed to protect. The system is what gives them their status and wealth. Question that and you threaten them where they are vulnerable.

It seems to me therefore that it is high time we questioned not just the probity, or even the solvency of the big global banks but their very intellectual foundation. It is time for us to wrench back the initiative from the banks. The financial elite have spent all this last year rewriting history so that blame for the banking crisis has been turned away from them and laid instead at the door of ‘people’ and then entire nations who ‘took’ on debts they coudn’t afford.

It is time to counter-attack and make the case, that it was and is the way that banks and banking go about their normal business that caused this crisis and are still causing it. We have to show that it was not a break down in an otherwise fine system which caused this crisis but that it was a result and consequence of a system which is an utter failure at doing what it prides itself most on being able to do – managing risk. Not just a onetime failure but a systemic failure which presents an on-going danger to the rest of us.

So let’s be clear. There is no systemic risk at all in welfare spending, no matter how large it becomes, for the simple reason that there is no surprise in welfare spending. It does not jump out at you unexpectedly. Welfare and social spending are a slow moving behemoths that can be seen coming for decades ahead. The only danger is they will trample you to death if you are stupid enough to stand there for decades listening, slack jawed, to the competing teams of witless cretins whose flatulent play-acting is all that remains of our political process.

There is, I suggest, a very clear, present and on-going systemic risk and danger from global banking. It was, after all, banking not welfare which gave us the phrase ‘systemic risk’. Bankers deal in risk. The welfare state deals in…welfare. Like it or loath it, there is no ‘risk’ in welfare or in social spending. They are linear and entirely predictable problems. Banking on the other hand not only deals in risk, it manufactures it. Risk is what bankers bank on."

monosierra's picture

Papandreou's Kebab Shop unsecured 2nd lien notes?


These bonds actually exist?

mantrid's picture

Bernank will have his stocks plunging. no LTRO3 soon? why would one need it if QE3 is coming?

ahem, that sell off will include (paper) gold & silver too. just don't panic if it falls to $1400. unlike anything else, that *will* be temporary... Roubini screaming about gold bubble again will be the best sign it's time to buy.

Attitude_Check's picture

FX swaps safe as houses....  I'm glad I wasn't drinking anything when I read that!

rrwoodward's picture

Man!!! you guys are good at digging up cool indexes off Bloomberg. Very nice!