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Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?
While much has been said about the vagaries in the European repo market elsewhere, the truth is that the intraday variations of assorted daily metrics thereof indicate three simple things: a scarcity of quality assets that can be pledged at various monetary institutions in exchange for cash or synthetic cash equivalents, a resulting lock up in interbank liquidity, and above all, a gradual freeze of the shadow banking system. As we have been demonstrating on a daily basis, we have experienced all three over the past several months, as the liquidity situation in Europe has gotten worse, morphing to lock ups in both repo and money markets. As a reminder, both repo and money markets (for a full list see here), are among the swing variables in shadow banking. And shadow banking is nothing more than a way to expand credit money while undergoing the three traditional banking "transformations" - those of maturity, liquidity and credit risk, although unlike traditional liabilities, these occur in the "shadow" or unregulated area of finance, interlocked between various institutions, which is why the Fed has historically expressed so much caution when it comes to discussing the latent threats in it.
Indicatively, of the $15.5 trillion in shadow US liabilities (by far the biggest such system in the world), $2.6 trillion are liabilities with money market mutual funds and just $1.2 trillion are repos. Indicatively, traditional plain vanilla bank liabilities amounted to $13.4 trillion as of Q2 (an updated for Q3 is imminent). As such, the focus on repo while useful, misses the forest for the trees, which is that not the repo market, but the entire shadow banking system in Europe is becoming unglued.
What explains this? Two simple words, which form the foundation of modern finance - "risk" and "confidence", and in Europe both are virtually nil. Seen in this light, the unwind of the shadow system explains much: the inability of Germany to place bunds, the parking of cash with the ECB, the freezing of repo, the plunge in the currency basis swaps, the withdrawal of money markets, the blow out of various secured-unsecured lending indicators, etc. All of these fundamentally say the same thing: there is too much risk and not enough confidence, to rely on the abstraction that is shadow risk/maturity/and liquidity transformation. All this is easily comprehended. What is slightly more nuanced, is the activity of the ECB and especially the Bundesbank in the last few weeks, whereby as Perry Mehrling of Ineteconomics demonstrates, we may be experiencing the attempt by the last safe European central bank - Buba - to disintermediate itself from the slow motion trainwreck that is the European shadow banking (first) and then traditional banking collapse (second and last). Because as Lehman showed, it took the lock up of money markets - that stalwart of shadow liabilities - to push the system over the edge, and require a multi-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it.
So just what is happening? Mehrling first explains the European funding status quo:
Apparently everybody, borrowers and lenders, public and private, wants the ECB as their counterparty. Reluctant though the ECB may be to step into that role, and vocal as the ECB has been about that reluctance, what we are seeing in practice is that it has no choice, literally.
Clearing imbalances within the Eurozone that cannot be resolved in the interbank market show up mechanically as imbalances between national central banks on the books of the ECB (see here for details). The ECB lends to the central bank of the deficit country and borrows from the central bank of the surplus country, so expanding its own balance sheet on both sides. (Think Greece on the asset side, and Germany on the liability side.)
Something quite similar happens when private banks settle private clearing imbalances not by shifting reserves from deficit to surplus but rather by the deficit bank borrowing from the ECB and the surplus bank lending. Again, the ECB balance sheet expands on both sides.
Why is this happening?
The underlying problem is that deficit central banks and deficit private banks increasingly have nothing to sell (or to pledge) that surplus central banks and surplus private banks want to buy (or accept as collateral for a loan). The ECB is also reluctant to buy--it is serving as pawnbroker of last resort , not dealer of last resort.
The consequence is that the ECB is more or less forced to lend, against more or less whatever collateral is offered; even bad collateral is better than no collateral. (The famous Bagehot Principle offers an out, since it urges valuation of collateral at non-stress prices.)
So far so good: this is the system that as noted above is slowly crumbling. So what is happening next? One read is the following:
Now comes the latest deal over eurozone fiscal rules , presumably the deal that ECB President Draghi asked for last week . It is a deal about sovereign budget discipline. But if I read Draghi's speech right, we should not expect him to be buying sovereign debt. (That will be the IMF's job, if anyone's, and with strict conditionality; details to be sorted later.)
Instead, he'll be buying bank debt, specifically the debt of the banks that hold the sovereign debt. Banks currently borrowing from their own national central banks will therefore be able to repay, and consequently the national central banks will be able to repay the ECB. This takes national central banks out of the picture on the asset side.
What about the liability side? Here, perhaps in a longer time frame, I think the logical move is again to take the national central bank out of the equation, by replacing liabilities to the Bundesbank with deposits to the credit of private banks. Freed from the responsibility to fund ECB loans to other central banks, the Bundesbank will be able to return to its preferred asset holding, German sovereign bonds.
One conclusion that is possible is that one proposed by Mehrling: "we're not going to be using the payment system to hide imbalances any more. The ECB is going to serve as a proper lender of last resort to the banking system, affirmatively and up front rather than mechanically and through the back door. But it will be doing so only to the banking system, not to sovereign debtors." It would be expected that some combination of EFSF/IMF funding would sourced the balance. In effect the ECB would intermediate itself directly in the national bank bailout scheme, allowing it to be more like the Fed, which has been the primary complaint against the ECB all along.
There is also one other explanation: the Bundesbank wants slowly and quietly out.
As a reminder, while the Fed is the one central bank in the world which supposedly has the biggest amount of gold in possession with 8.1 thousand tonnes, Buba is #2 with 3,401 tonnes. In other words, it has a solid backing to its fiat asset representation. However, unlike the Fed, the Bundesbank is part of a nation that has a natural trade surplus and thus is cash flow positive from a current account perspective. One may say that Germany, far more than the US and the UK, is the world's truly AAA-rated nation. All this means that the Bundesbank, if disambiguated from the ECB, where it currently is accountable for funding a major portion of deficit nations' funding deficiency, would regain its status as the world highest quality monetary institution. And going back to the beginning, it is the Bundesbank which is effectively depleting "good money" in exchange for "bad" either in the form of undervalued collateral through the repo markets, or soon to be devalued fiat.
Here one has to keep in mind the primary prerogative of the Buba - keep inflation low. If that means detaching from a failing currency, or halting asset-liability matching in which it hands out good money in exchange for worthless assets, so be it.
Which is why another interpretation of the ECB's proposal is not to bring the ECB as a lender of only resort closer to the peripheral, deficit nations, but to commence proceedings for severing the umbilical cord of the Bundesbank with a Eurozone which is doomed in all but the most optimistic eyes. Bringing us to our question: for anyone wondering what the future of the Eurozone is, should they merely observe what steps the German central bank is stealthily starting to take. Because if indeed the Buba wants to have as little as possible with Europe, what does that mean for the EUR, and for Europe itself?
Full video explanation below:
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Sanford Weill is a thief.
They own the casino and have the games all rigged. The question for everyone else is what can you do if you *don't* own the casino.
Oh yeah Robo, those who sit next to the money printers do better?
Tell us something we don't know.
pods
Only long-siders doing well in these manipultaed paper markets are in-siders ...who go short fairly often too ...when they're tipped off ahead of time.
I am fucking tired of this shit. Enough already. Fuck
Nothing like the look on 100 faces from the DC area when I predicted that the Euro is dead and it is a fool's errand to attempt as rescue. One poor soul said "I agree, but it won't bother the U.S."
It reminded me of that scene is Zoolander when Derek asks "Why male models?" Are you kidding? Didn't you just listen to what I said?
Economic Minute Presentation on the European Financial Crisis – Low GDP Growth, Staggering Debt, Geithner On The Prowl In Europe!
http://confoundedinterest.wordpress.com
Off topic but we got ourselves a real Lady here in Nevada.
“This crisis is causing great havoc on the economy of Nevada,” Attorney General Catherine Masto said today. “Neighborhoods are descending into blight.”
She is going to sue the broken banks along with CA. AG. And there is no doubt Nevada is in a depression. :Thank you Harry Reid.
Is Mustang Ranch Hurting? There is also 4th Street if times are tough.
Let the games begin....I mean global collapse
I hope you have plenty of dingos stocked away.
The article says the Fed has 8.1 thousand tonnes of gold. I thought it was our Treasury that had the gold. Or at least pretending to. Fed/Treasury, that's a big difference.
details, schmetails.
like the 8.1 thousand m/t exists there anyway,
It was safely transferred across the sea and is now protected by a Red Shield.
pods
lol, like it's there
The single currency idea for the Eurozone was an idea born inside the transcontinental banking cartel as a means to loot the continent. Fiscal union only works through sovereign union..something that hasn't occured since the Hapsburgs...and even that ended in bloodshed.
Very few currencies have deserved execution more than than this 12 yr. old experiment. It's been a tool for financial mischief since inception. It must die and it will die.
Larry Kudlow is calling it right now! Who is going to { Enforce}, these pacts?
The waffles are sooo over cooked, I would rather have wood chips for [ Breakfast ]...<
Bingo.
FT's Alphaville touched on this today as well. Some excerpts, showing how the Bundesbank itself is now on the precipice because it now holds so much worthless periphery debt.
What it boils down to is that the B-Bank can no longer keep underwriting what Mehrling refers to as the "payment system", which is what is in eurospeak called "Target2"...
= = = = =
"The Target2 system is indirectly propelling the German Bundesbank to sell off all its assets to finance the lending of other Eurozone central banks. So much so, it hardly owns any assets of its own all any more."
..."what happens when the Bundesbank runs out of assets to sell?
Already compromising the Bundesbank is the fact that its stock of bonds reached zero long before the 2008 crisis even broke out. The only firepower the Bundesbank had left was its stock of loans to the private sector.
But even this is fast approaching zero. At the end of October 2011, loans outstanding stood at a meagre €21bn. In 2008 they equaled €277bn.So what could it do next to raise funding instead? There are two obvious choices: sell gold (€132 bn worth) or sell off the Bundesbank’s international reserves (some €49.5bn) ."
..."Before long, however, the Bundesbank’s stock of domestic assets is going to hit zero, and it is highly unlikely that it will agree to sell its gold or borrow more in private capital markets.
At that point, the Bundesbank will not be able to lend more funds to the Eurozone TARGET mechanism. As a result we are heading towards the multiple equilibria zone in which beliefs of a breakdown of the Eurozone are self-fulfilling."
http://ftalphaville.ft.com/?se...
Interesting. I find this via Google.
"Recent years have seen a sharp reduction in borrowing by peripheral banks from German banks through interbank money markets and bond markets. The peripheral banks have replaced much of this interbank borrowing with borrowing from the ECB via its lending (refinancing) programmes. The result has been a large net transfer of funds from, for example, Irish banks to German banks."
"Target2 is the Eurozones’s “plumbing system” that enables these transfers. This works as follows. Eurozone banks maintain accounts with their country’s central bank. When an Irish bank writes a cheque to a German bank, the Target2 system deducts the Irish bank’s account at the Central Bank of Ireland and credits the German bank’s account at the Bundesbank. Technically, the Bundesbank incurs a new liability in the form of an increase in the value of the Bundesbank account of the bank cashing the cheque but this is offset by a claim against the ECB which appears as an asset on the Bundesbank’s balance sheet."
"Recent years have seen the Bundesbank accumulate large Target2 claims against the ECB while other countries have accumulated negative Target2 balances."
Now, checking some more I see the Bundesbank accounted for 69% of Taget2 claims at the end of October, (claims against the ECB). Only four CB's had net claims: Germany, Luxembourg, Netherlands & Finland. Germany's share was EUR 465 billion.
The larger Target2 debtors are Ireland, Spain, Greece, France and Italy all in the hole ~EUR 100 billion each, with some rounding.
Are the Germans running out of assets or just feeling too long ECB claims?
If the Bundesbank is wanting to step aside from the EU which would confirm my own intuition then I would bet that Geithner is stepping in it through the IMF/Fed. By the way Geithner is willing to bet your last dollar as well so you should care. Would anyone doubt that the US Treasury Secretary is hell bent on destroying the US dollar if this does come to pass?
I think it's less to do with destroying the USD, but rather to revalue it agianst the Remimbi. It is actually the Chinese peg that is the causing the major imbalance problem globally. So anything that TTT can do to weaken the USD, he is willing to try.
Think about it, if the Rump Euro loses 50% of it's value, it becomes more competitive versus the Remimbi, i.e. helps rebalance the balance of payments.
Where is their gold? I would guess that all the gold supposedly held by these central banks is not what or where it is supposed to be and that the real metal is controlled by the same folks behind the curtain yanking the chains of our central bankers.
They are attempting to dominate the world. This collapse is meant to be the big distraction. As this distraction peters out they will provide more shock and awe. They are doomed and so are most of the sheeple.
Gotta go, dancing with the stars reruns are coming on.
There are a number of problems that exist in the Eurozone, one which has been an unintended consequence of ZIRP by the Fed. Many of the European banks have taken advantage of cheap money from the Fed, providing repo financing against collateral (sovereign, corporate, etc.) the money has been borrowed in USD and loaned out via repo to collateral that is now severely impaired; i.e. 25-50% haircuts. There is now a huge black hole in all of the Bank's balance sheets whereby the pledged collateral has created huge losses. This has also created a very large short position in the USD on a global basis that the ECB, the Fed and the other Central Banks of the world are very concerned about. A major short squeeze would decimate all risk-on / commodities. This is why the Central Banks attempted to act in concert last week. The problem we have is far greater than Lehman in that the Fed and Central Banks in attempting to reflate have created such a large USD short position because of the underlying losses due to pledged collateral that has deteriorated in value.
Germany has realized that the Euro is doomed for about a year now, and has taken steps to create an off setting hedge in the event it withdraws from the Euro and goes back to the DM. It has been in their interest to promote various positive feedback loops which have created numerous risk-on opportunities over the last year. They have been very deft and clever in this situation selling futures and hedges across all markets over the last year. Does it real manner if they have sold S&Ps at 1100 or 1250 if they collapse to 700; Gold between 1700 - 1900 when it plummets to 1000; Oil at 90-100 when it collapses to 50; Silver between 32-45 when it collapses to 10; and lastly the Euro between 132-145 when it goes to par. The markets have been controlled by Germany with everyone playing along as if there is going to be a positive outcome. The Austrian school of economics has always been at odds with the Keynesians. they have realized for over a year now that there is no way out of the debt mess. An early exit would have resulted in substantial losses, but an orchestrated one where Germany sets up the ultimate hedge by being short against all risk on classes when it pulls the plug would protect the Germans from huge losses.
you are making so much sense...
how is Germany going to collect? you don't think there would be penalties that could cost more (war, boycotts, tariffs etc.) if it came out? agree, that Germany is playing poker with a single pair and they're bluffing and selling into bullshit strength but collecting on short positions would be a problem.
What's with this war nonsense. To wage a war, you need an Army. It is obvious from the Afga/Iraq/Libya engagements that the Euro states can't even muster a contigent force for the Nato ops.
There is a repeating theme in my head. IT IS ALL BULLSHIT. They create the laws and break/change them with impunity. If necessary, they seize life savings. All insiders receive immunity from prosecution. When the system breaks, they blame us. IT IS ALL BULLSHIT.
Wash, rinse, repeat.
Congratulation!
You've now passed the proficiency exam for public service...
Couldn't agree more! The more things change, the more they stay the same.
Makes you wonder how a financial collapse is going to affect the definition of assets as we go forward. Italy, Spain, Greece, France, are all going to be able to feed themselves. Many northern countries won't be able to return to an overfished ocean. It doesn't make sense to only consider solutions where a magical soft landing lives happily ever after in places where they rely on a dozen other nations for their food alone.
It is no wonder the Great Depression and Weimar are roundly criticized as being a poor comparison to what is happening now. We are working hard to repeat history and denying it at the same time. What can happen?
I don't see why the Germans would allow the ECB to bailout the banks in other countries? I am content not to be a CB expert but I think the Hun just want to buy some time as cheaply as possible. The meeting with Geithner may have set insincerity records.
This Euro mess has gone on far too long. If left unresolved it could, in time, destabilize the global economy!
The Eurozone Heads of State must call a comprehensive Eurozone Summit immediately. They urgently need to begin discussing possible future actions that could be considered as starting points for theorhetical beginning steps to take place at an unspecified later date, perhaps June 2012 or maybe after, to address the Euro crisis. Anything less just won't do it any more.
It is crunch time. I urge the European leaders to start talking about serious actions as soon as the Christmas and New Years' Holiday Bunga Parties are over. March at the latest.
Plan B is let Euro die...
No Eurobonds – no euro
According to the EU monetary chief, the eurozone may only have a few days left to find a way out of the crisis. But economic analyst Michael Mross believes that Germany would rather let the euro die than support the idea of Eurobonds.
http://www.mmnews.de/index.php/english-news/8997-no-eurobonds-no-euro-
Red Light...Yellow Light...Green Light...we know when to go.
Skip the BS and go to 10:33-10:55 min.
When you see this happen...the same will be true as hell comes from above.
http://www.youtube.com/watch?v=fGe8RPAkZcg&feature=related
This is the rhyming of history in full bloom. Six months ago the markets rallied no less than fifty times on each new rumor of a solution to the Greek debt woes. Eventually, of course, there wasn’t any solution. Attention shifted upstream.
Today it is the entire EU, and another seemingly endless series of rallies on the back of now daily “solution” rumors.
I suppose when this finally fails we might have one more iteration in the form of an IMF bailout of the ECB bailout of the PIIGS, but this refrain is getting old.
What we have is Rube Goldberg designing a savior mechanism that is being marketed by P.T. Barnum to the offspring of carnival people
Stabeelitee is at hand!
Germany stepping out leaving the euro to France and club-med
Which is why another interpretation of the ECB's proposal is not to bring the ECB as a lender of only resort closer to the peripheral, deficit nations, but to commence proceedings for severing the umbilical cord of the Bundesbank with a Eurozone which is doomed in all but the most optimistic eyes.
There's nothing immoral about abandoning a sinking ship. Germany will dump PIIGS problems in ECB's lap and leave the EU.
Some user comments really help me better what Tyler is saying (I still have a lot to learn about the market) and man this thread was completely worthless. Bunch of "clever" one-liners and "witty" analogies.
Sorry Turtles, but we've discussed the Euro mess on ZH so much over the past two years that all the pithy ZH-side insight has already been repeated about twenty times. So, rather than repeat the obvious one more time, we roll our eyes and post some "witty" shit instead.
Even Tyler now prefaces his Eurofix posts with a few "here we go yet again" zingers.
sorry but here's another one http://www.youtube.com/watch?v=nIVediB0sZo
This is random. Serves it's purpose. http://www.youtube.com/watch?v=p8jJ1ORIOes
Sarcachasm/ Mis - spell intended. Watchout for those ( FED GIV-AWAYS) , IN Europe. Yields are Interbank large.
The Big Douche Chill.
"Here one has to keep in mind the primary prerogative of the Buba - keep inflation low."
This is incorrect. The primary prerogative of any CB is to back stop the biggest banks.
just an appendum [?],... some dated background on how the world's financial markets became entrenched in a death spiral that was, 'designed-to-fail' -
#1)____ bush #41 lost -'no new taxes[???]' ,... but had previously pushed hard for 'free trade'[?]
#2a.b.c.)____ *CLINTON* [#42] passes (a)"NAFTA", jan/1994 [??] --- passes [?]/ endorses/implements the (b)"WTO" Treaty[?], jan/1995 --- passes[?]/endorses/implements the (c) "GATT", nov/1999
ref:___http://www.2.econ.iastate.edu/classes/econ355/choi/gatt.htm
PLEASE NOTE: {sic/ quote [?]} by the narrowest of margins -- with v.p. al gore breaking a tied vote in the senate -- president bill clinton raised taxes again in 1993, and house democrats were pummeled in the following years mid-term elections, giving up control of the chamber to the GOP for the first time in 40 years.
but then, after two decades of deficits, the fiscal picture brightened unexpectedly. the peace dividend at the end of the 'cold-war' combined with the booming economy of the 90's [*and some tech-bubble tax receipts] to create an unexpected dilemma in 2000: what to do with the budget surpluses that were forecast[?] for years to come [sound familiar?] ?
one obvious idea was to pay down the existing publicly held debt, then hovering around $3.4 Trillion !!!
STOP ___ read between the lines - you'll quickly see that the false pretenses that brought us a positive cash flow were to be very short lived,... for many reasons of which the astute readers here at ZH are fully apprised.
thankyou tyler and co.
ps. if link fails follow 'google oops', scroll down and link better read: [pdf] 'the external environment'
Apparently, Obama's Plan B is to stand on stage and be a big, fat liar, pretending to be a populist reformer. OH, IT MAKES WANNA SPIT! Sorry, I just had to get that off my chest.
Has anyone ever heard a politician use the phrase "the shadow banking system"? Didn't think so. If Tyler is right, and shadow banking is just a way to expand credit during times of transformation, I don't know why everyone is so afraid of talking about it. But, that's not actually what he is saying. Shadow banking inevitably creates shadow risk, and I think it is clear that the creation of shadow risk is the raison d'etre of the system. The NY Fed link was very clear: when things got bad, investors became afraid of "illiquid assets with too much complexity and opacity and too much exposure to counterparty risk."
The ability to create complex, opaque, illiquid assets and keep your counterparty risk hidden would disappear if the shadow banking system was brought into the light. Please God, let the shadow banking system in Europe come unglued. When Lehman failed, the lock up of money markets DID NOT REQUIRE a multi-trillion dollar bailout. The lock up of money markets meant major losses were inescapable, so they stole from us because they could. And now, in Europe, they are going to steal from Europeans unless they are stopped dead in their tracks. The Fed took trillions in worthless securities as collateral and now the ECB is going to do the same, but don't say they are being forced. They are CHOOSING to do it, because they are criminals!
Look! Up in the sky! Millions of pidgeons coming home to roost. Do you suppose that the glorious statue of Kaiser Wilhelm will be able to support them all? Oh no, his sword arm is crumbling under the weight. Mein Gott - what is happening!
Ok, thanks Tyler. I'm off to Berlin to buy me an apartment block. Are they still cheaper on the East side?
Why keep debating what plan it is, when those who make the rules get the luxury of never ending plan A.
For real people, mistakes are generally cumulative and often held against them.
If you’re the power elite, you can have plans to make plans all through the month of October, sparking a huge market rally, then all your plans go to shit, and then with no collective memory whatsoever you get to make all new bullshit plans to make more bullshit plans 2 months later and soak up praise and generate more market rallies.
For the global elite it’s plan A in perpetuity, with no memory of yesterday. If yesterday counted, has there been a more wrong human being in the history of wrongness than benocide? – The man has been consistently wrong year after year after year, but every day for him is brand new.
Every day is a clean slate for them, and a fresh chance to be wrong all over again. Not so for you.
Geldmark is around the corner...it will be the Mark backed by the yellow metal I bet you...same as during the 1930's, and it will be The Only Mark people will accept imo.
Yes, This is the preperatory phase for Germany to leave the Euro. It is the only way to disentagle from the Eurozone without causing a catastraphy. This will allow the Rump Euro to revalue, and the Club Med including France to regain competitiveness relative to the DEM. This might be the reason why the stall defense is being used by Merkozy.
If this is the case, I think it's safe to say that we are in the final phase of the Euro currency. The delay with the never ending summits is actually due to the planning of a rather controlled break up.
Why exactly should Germany leave ?
Just kick GB out.
The Anglo-American Financial System going up in Flames is going to be hard but we'll survive.
Maybe at least people will realize that an economy where everybody is a trader and nobody makes the Goods doesn't fly.
The lower the euro goes, the more German products are sold outside the EU area.
If you were Germany, you wouldn't mind stringing out the debate on who stays in the EZ for as long as possible since you have nothing but upside either way, in terms of jobs, or alternatively international purchasing power.
Plan B .Thats so fucking mini me