European Companies Are Now Funding European Banks And The ECB - Is "Investment Grade" Cash Really Just Italian Treasurys?

Tyler Durden's picture

While hardly news to those who have been following our coverage of the shadow banking system over the past two years, today Reuters has a curious angle on the European "repo" problem: namely, it appears that over the past several months the primary marginal source of cash in the ultra-short term secured market in Europe are not banks, the traditional "lender" of cash (for which banks receive a nominal interest payment in exchange for haircut, hopefully, collateral) but the companies themselves, which have inverted the flow of money and are now lending cash out to banks (with assorted collateral as a pledge - probably such as Italian and Greek bonds), cash which in turn makes its way to none other than the ECB (recall that as of today a record amount of cash was deposited by European "banks" with Mario Draghi). From Reuters: "Blue-chip names like Johnson & Johnson, Pfizer and Peugeot are among firms bailing out Europe's ailing banks in a reversal of the established roles of clients and lenders. One source with knowledge of the so-called repo deals or short-term secured lending, said the two U.S. pharmaceutical groups and French carmaker were the latest to sign up for them." Which intuitively makes sense: as has been well known for years, companies are stuck holding on to record amounts of cash, although what has not been clear is why? Now we know, and it is precisely for this reason: corporate treasurers have known very well that sooner or later the deleveraging wave will leave banks cashless, and corporates themselves will have to become lenders of last resort, especially in a continent in which the central bank is still rather concerned about sparking inflationary concerns.

Naturally, in this environment in which the traditional lender-borrower relationship has been flipped, reading news such the notification that Libor has actually declined, creates nothing but hilarity. Of course this kind of complete lack of credibility is precisely the problem. Unfortunately European financial institutions have none left. What is far more concerning is the question of just how far this practice has spread: have American cash rich companies handed out cash to Euro banks "pledged" with European sovereign bonds (with or without a haircut), and if so what happens when the collateral is found to have far less value than presumed? Once again we go back to MF Global, which blew up precisely for this reason: is the entire Investment Grade space about to get whacked on concerns it has Italian bonds on its balance sheet, via the repo market, instead of actual cash 'and equivalents'?

More from Reuters:

Europe's banks are struggling to secure the cash to fund their day-to-day business and have largely stopped lending to each other for fear Europe's sovereign debt crisis could land any of their peers in trouble.


As a result a group of well-known, cash-rich companies with solid cash flows has stepped in the repo market, which provides a form of lending so far almost exclusively in use between banks, and between banks and central banks.


One market participant said in one key area of lending companies now accounted for 25 percent of these deals.

Oddly enough, once received the cash goes not back into the economy to spur money velocity, but is parked with the ECB:

Repos provide the new financiers with the strict guarantees they need before parting with their cash, answering worries that the crisis has weakened Europe's banks to the extent that they might not be able to pay the money back.


"Companies in the past were ... happy to deposit cash on an unsecured basis to a bank for an interest payment," said Frank Reiss, who oversees some of the repo business at Euroclear, the Brussels-based settlement house owned by a group of banks.


"Now following the crisis, we have seen that companies are engaging in repos secured with collateral against the cash they are lending," said Reiss. Euroclear is the largest administrator of repo trades in Europe.


At the moment the European Central Bank provides the main lifeline for banks and has pumped hundreds of billions of euros of cash into the market.


But the banks are parking most of the money they borrow back at the ECB rather than trusting to lend to each other.

It is time to shift focus from banks and straight to the top of the Investment Grade pyramid:

It is typically these very large companies, with reliable cash flows, that engage in repo deals with banks, Euroclear's Reiss said, though he declined to give the names of any counterparties, because of client confidentiality.


Corporate treasurers are typically extremely wary of talking about their day-to-day cash management, and Johnson & Johnson, Pfizer declined to discuss the matter. Peugeot was not available for comment, while other large companies contacted by Reuters also declined comment.

And while we have covered the topic of shadow banking and repos extensively since early 2010, here is the 30k summary of the relationship:

Regulators cracking down on "shadow banking" -- closed-door deals blamed in part for the 2008 financial crisis -- have expressed worries about how opaque the repo market is, and the U.S. Federal Reserve has set up a working group to suggest reforms.


The rise in repos means more business for companies such as Euroclear and its main rival Clearstream -- owned by Deutsche Boerse (DB1Gn.DE) -- as well as Bank of New York Mellon (BK.N), JP Morgan (JPM.N) and State Street (STT.N).


In a repo trade, one party buys collateral from the other, with the obligation to sell it back at a pre-defined later date and for a slightly lower price -- the so-called haircut. That way, the seller provides cash to the buyer.


When companies rather than banks engage in repo deals they typically rely on a third party for administering the collateral, in what are known as triparty repos.


The triparty market grew at 22.3 percent in the first half of last year, a survey by the International Capital Market Association (ICMA) showed, versus only a modest rise in the overall business, further prove that companies are increasingly accessing the market.


"It shows you that triparty is growing, but ... not the banks themselves," said Richard Comotto, an academic who is involved in drawing up the survey. "I would say triparty is very growing strongly among corporate treasurers."


The European repo market was worth 6.2 trillion euros ($7.88 trillion) in the first half of 2011, according to ICMA's September survey. The vast majority of business conducted was between banks, and banks and central banks.

The biggest concern is that with every passing day increasingly more "good money" is being recycled into the system however collateralized by increasingly worse collateral, until the weakest of all collateral will have to be utilized. This means that the actual value of the currency is also declining as it is backstopped by "assets" that have progressively lower LTV to the cash they pledge. And the biggest threat for Europe, one which we will observe shortly, is that unlike in the US, the bulk of traditional corporate lending is via secured loans, which already have assets pledged as collateral, unlike the US where the bulk of lending is via "guaranteed" loans that are unsecured and thus only have a recourse to corporate cash flow. This means that as more and more cash is needed, absent a wholesale corporate restructuring in which corporate loans are "de-liened", collateral will necessarily have to be of ever spottier quality until the entire shadow banking system implodes once again. Of course, the fact that this is the case does not mean that anything will be done to fix it. For the simple reason that there is nothing that can be done to fix it.

In the meantime, focus on those uber-safe IG companies with "massive" cash hoards. Something tells us the world will be quite surprised to discover it mostly consists of Italian bonds floating around at a 2% haircut somewhere in the multi-trillion repo market.

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TruthInSunshine's picture

This is exactly like when your dad gave you $10 to mow the lawn each week at the age of 15, then docked you your allowance for the year when you came home at 3 am after your first saturday night/morning bender.

Did you have to quit mowing the lawn?


*Krugman just tweeted that one should have smashed the lawnmower with a sledgehammer, requiring the purchase of a new one, in response to dad's disciplinary action, as this would have been far more stimulative.

**Maybe Leo is #winning this morning? 01-09 10:37: Market talk that Firstsolar (FSLR) is subject to takeover -...

redpill's picture

Not nearly extreme enough to be kredibly Krugman. It's more like, an asteroid slammed into the garage and destroyed the entire building along with the lawn mower and both cars. What comes next can only be described as miraculous economic growth. What fortune!

TruthInSunshine's picture

Excellent point.

I am far too conservative to capture the essence of Krugman's destructive stimulatism.

The asteroid would be the shot across the bow, launched by hostile Uranusian invaders, hell bent on invading and harvesting earth's resources.

redpill's picture

Now you've got it!  But please, the politically correct term is "Uranals."

Badabing's picture

Oh I get it, its like shoveling food in your ass and take a shit from your mouth.

IBelieveInMagic's picture

Tyler man, you are relentless! This is beyond insane... I have been suffering from repeated bouts of laughter contemplating this circle jerk.

spiral_eyes's picture

mmm sweet fungible securitisations...

shadow banking, bitchez!

greyghost's picture

i don't get why these companies just don't start their own banks instead of shovelling more money down alice's rabbit hole? their banks would probably be the only ones standing in the end. but alas you can't think outside the box when you don't know there is a box, who made the box and what is the box made out of. talk about a narrow oneway tunnel of a education system.

StychoKiller's picture

...and corporates themselves will have to become lenders of last resort, especially in a continent in which the central bank is still rather concerned about sparking inflationary concerns.

WHY would you give a drunk another drink, and accept empty bottles as proof that you'll get yer FRNs back???

DoChenRollingBearing's picture

If I were such a company, I would only take GOLD as collateral.  Sitting there in my company's vault.

LeBalance's picture

but that it is talking place (Illuminat)es the true structure and relative power positions.

Irish66's picture

speechless, hence more job losses

Whoa Dammit's picture

This is going to end well. /Sarc

papaswamp's picture

Holy!  Talk about a convoluted, rigged system.

Jlmadyson's picture

A true lender of last resort haha. They have nothing left.

NotApplicable's picture

Well, they've still got friends with guns. That's obviously worth a basis point or two.

CoyoteBlue's picture

On Fiat Planet - YOU lend to Banks!


Gandalf6900's picture

WE have always lent to banks, but the money would stay there, now it is lent to banks to be sent to ECB, to be then re-lent to banks...puzzling

hedgeless_horseman's picture



I understand disintermediation and intermediation, but what is this?  Reverse-disintermediation?

The biggest concern is that with every passing day increasingly more "good money" is being recycled into the system however collateralized by increasingly worse collateral, until the weakest of all collateral will have to be utilized. This means that the actual value of the currency is also declining as it is backstopped by "assets" that have progressively lower LTV to the cash they pledge.

You have to be a fucking idiot to not see where this is heading.

Tyler Durden's picture

And here is the kicker:

those BTPs pledged to Peugeot or whoever have likely been rehypothecated by 10 entities in a row, and nobody really has any idea who the end owner really is...

Gandalf6900's picture

and that is exactly how THEY like it

Irish66's picture

it means to me that we have zero chance now of surviving, it will take every company 

with it.

NotApplicable's picture

On a long enough timeline...

Hephasteus's picture

"it means to me that we have zero chance now of surviving, it will take every company 

with it."

That's the masonic corner stone. Build a terroist society that is difficult to remove because everything has been centralized. Then apply as much force and bullshit as you can away with till everyone snaps and the skipper slaps gilligan with the cap one too many times and he starts beating everyone up with coconuts. Natures carbon fiber hammers.

hedgeless_horseman's picture



Fractional reserve banking systems ALWAYS end this way...the implosion is just going to be orders of magnitude worse this time.  Sometimes I wonder what will be the trigger that starts the run, but then I realize that it is not really important.

GeneMarchbanks's picture

At some point there'll be a: "Ehr... can I take a look at that physical collateral?"

But even still, the people with the guns will have taken over by then anyways...

gojam's picture

Putting aside the aprox $20 trillion debt.

Anyone have a clue (ballpark) the 'value' of worthless toxic 'assets' still on the books ?

..........and the value of the derivative 'assets' that will become worthless once the the current worthless 'assets' on the books are exposed ?

.........................and how much has been leveraged against those worthless 'assets' ?

 If notional value of global derivatives is $708 trillion (but could be double ) what percentage of that is smoke ? Just how big is the black hole ???

HH, you're switched on, fancy a guess ?

hedgeless_horseman's picture



Does it really matter now that Europe has lowered the reserve requirement from 2% to 1%?



gojam's picture

That's in contravention of Basel III.

I think it matters in as much as unless a ballpark figure can be put on the blackhole then people aren't going to realise how futile it is to try and paper over it.

And until people do then 'the powers that be' will just try and mend the system, when obviously it needs recasting.

I'm assuming the lowered reserve is because banks don't have the capital and not because 'assets' have been written off.

Non Passaran's picture

Says who?

The article you linked says 2%. What's your point?

hedgeless_horseman's picture



Says the ECB...

8 December 2011 - ECB announces measures to support bank lending and money market activity

To reduce the reserve ratio, which is currently 2%, to 1% as of the reserve maintenance period starting on 18 January 2012. As a consequence of the full allotment policy applied in the ECB’s main refinancing operations and the way banks are using this option, the system of reserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions.


My point in responding to the above question, "How big is the black hole?" is that the size of the black hole doesn't really's a black hole.  What does matter, however, is how close one is relative to the event horizon.  Reducing the reserve ratio to the desperate level of 1% tells me we are very close, and maybe even beyond it.

gojam's picture

Thanks for the reply HH, I appreciate it.

I think that psychologically it is important in relation to global GDP ($65 Trillion)

I think as long as people are unable to grasp the size of the fundamental problem, which has so far swallowed the banks' money, Countries' money, printing money, and as you point out with the reserve ratio, leveraging on smaller and smaller amounts, and the hole is still far from being filled, it's exponentially growing.

As long as people don't get it, then Govs and whoever else is pulling the strings can get away with 'making do' and 'muddling through', attempting to mend a system which is unmendable. Once people get it, and realise that muddle through means debt slavery, then a recasting of the system will have to follow.

LawsofPhysics's picture

Shit Tyler, the world is insolvent (not enough real collateral in hard assets to back all the paper), but thanks for helping us front-run all the paper bullshit.

hedgeless_horseman's picture



...thanks for helping us front-run all the paper bullshit.


TruthInSunshine's picture

No one really believed The Bernank's transparency farce now, did they?


That's soooo pre-Battle of Waterloo.

papaswamp's picture

...hey just like the mortgage lemnder fiasco. Guess they figure it can go on for a few years before it's discover no one owns it.

GeneMarchbanks's picture

Psshhht! Only 10 times? That doesn't even qualify as hyper-rehypothecation.

Teamtc321's picture

And while doing grass root's business in the U.S. they want us to have perfect book's, pay sales tax on product's sold by the 15th of the following month, report every hour per employee to suck more work comp. money etc. The list goes on while the boot is on our neck. 

These dirty mfer's.  

cranky-old-geezer's picture



It won't matter in another month or so, EU will be dead and disintegrated, Euro will be relegated to history books.

Any day now.........

Gandalf6900's picture

I love the smell of rotten collateral in the front lawn

Wakanda's picture

Smells like fascism.

Snakeeyes's picture

Bingo! Peugot lender of last resort?


Wakanda's picture

How about Fiat lending fiat?

Gandalf6900's picture

Good point, will FIAT lend fiat?

Sandmann's picture

This is precisely why the actions of Gordon Brown and other politicians was so criminally insane. They are so in awe of Bankers that they were taken hostage in a Stockholm Syndrome and delivered the keys to National Treasuries to Incompetent and Venal Banking Cartels rather than funding NEW Banks owned by Cash-Rich Industrial Companies. They could have revived economies by having Cash Rich Corporations set up new Chartered Banks as Long-Term Credit Banks for funding SMEs  but NOT Consumer Credit. They could then have broken out the Consumer Credit arms of Zombie Banks and imposed a haircut on Credit Card Debt to stimulate the economy. Instead we are stuck with Future Economic Growth locked into Zombie Banks

NotApplicable's picture

You're confused, what you've described is criminal genius. The insanity comes from taking it all at face value.

NotApplicable's picture

Now, how many of those corps are floating their own paper to fund this bailout?

Interesting scenario, both sovereigns and their banks blow each other playing nuclear hot-potato (where it just keeps getting hotter), then the only entities with tangible assets remaining are called in to provide "liquidity of last resort" as they still have the ability back their debt.

I'm assuming that eventually though, that this "risk-free" carry-trade will undermine corporate capital in some fashion, as they become more and more exposed to this sovereign tree-shaking exercise. Perhaps this might be the final straw that ushers in Fascism, as "all options will be on the table" in an all out effort to safe both?