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Italy Goes The Full Monti
Via Peter Tchir, of TF Market Advisors,
It was just a little footnote to the LTRO announcement. Just a little statement that 40 billion of the collateral received by the ECB was newly issued, newly guaranteed Italian debt. The more I think about it, the more uncomfortable I get.
The ECB claims they have 40 billion of Italian government bonds on their books from the LTRO. The banks say they pledged 40 billion of Italian government debt. The Italian government doesn't acknowledge it as debt. Maybe it will show up in a footnote somewhere, but that is about it.
So while approving some new austerity measures that are unlikely to work, the government added 40 billion of contingent liabilities. The rating agencies can't be happy about that. Investors shouldn't be happy with that. Rather than being a new source of funds for Italian debt (the most optimistic view of LTRO) it created new debt! It is adding to Italy's debt problem.
And I can't even figure out why they did this. Didn't banks have other eligible collateral? Have they already pledged anything decent they own to the ECB or private lenders to get funds? Given the size of the balance sheets that is unbelievable but yet there is no explanation of why they didn't have more 'normal' assets to pledge.
Is this just a ploy to inextricably link the Italian banks to the government. The banks could have borrowed direct from the ECB. Bizarrely enough they may have even been able to post their own non government guaranteed debt directly but that was too obviously Enronesque?
Everything about this deal makes me squirm. The LTRO seemed like a decent idea to me. It wasn't solving anything and was unlikely to help create new sovereign debt demand, but it would relieve funding pressure on banks. For the most part that is probably how it is being used, but this ploy by the Italians feels all wrong. It feels like a dirty game and scares me that I can't figure out the angle behind the dirty game. Creating such a large new contingent liability for Italy seems both unnecessary and downright stupid. How will the market gain confidence in Italy and buy their debt when you don't know how much debt is outstanding. These banks aren't in great shape, so the guarantees could be called on.
I think the market will grow more negative on Italy as it digests what it has done and loses faith in the technocrats. If Italian debt slides again it will drag the market down. This little "scam" was ill advised in my opinion and sadly is the sort of thing a technocrat may actually believe in. They are fans of form over substance and tend to thing of credit in vague and unrealistic ways. They like to pretend guarantees aren't real. They view short dated risk as, ummm, un risky - which may explain the 3 month term.
I am scared that as these contingent liabilities hit the spotlight we will find that the sovereign debt problem is far far bigger than we have realized.
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'I am scared that as these contingent liabilities hit the spotlight we will find that the sovereign debt problem is far far bigger than we have realized.'
Bini Smaghi wants QE. We're on the verge here, either the ECB steps in(it won't) or the Fed(remains to be seen)
"Never let a crisis go to waste" so they're using this to slowly outlaw cash transactions, supposedly for taxation reasons, though they admit the evasion is commited on transactions below 1000 euros.
http://www.bloomberg.com/news/2011-12-22/italy-attempts-to-kick-the-cash-habit-as-monti-cracks-down-on-tax-evaders.html
"The government on Dec. 4 reduced the maximum allowed cash payment to 1,000 euros from 2,500 euros.
“If they force us to use credit cards, prices will go up,” said d’Andrea, noting that many retailers offer discounts to customers who pay in cash."
More control/tracking for the TBTF banksters (read vampire squid).
This cashless idea coming to the US? Why not?
By making the largest bill denomination the $100, they have gone a long way toward this.
Eventually, the $100 will be the new $20 and more than pocket change will be impractical.
Euros are at least available in 200's and 500's
Swiss franc note is available in 1000 francs denomination, worth well more than 500 euros ... the world's real sophisticated slick big-denomination note ... the 'smart money' in terms of fiat.
Canada does not print their 1000 Canadian dollar bill anymore, but it is still circulated ... said to be still popular for bribes to the Canadian politicians who betray their own people to serve the interests of US oligarchs, signing away Canada's sovereignty.
Here's the 1000 Swiss franc note, from the Swiss National Bank website:
http://www.snb.ch/en/iabout/cash/current/design/id/cash_current_design_1000
this is a non-story. of course banks would want to post the lowest quality assets first. the lowest quality asset that the ecb will give free money for and which is possibly "worth the risk" is italian debt (i.e. some banks have chosen to take a chance on italian bonds for the juicy carry). greek debt is too far gone, and if it still qualifies as ecb collateral it soon may not. the ecb will have to keep accepting italian bonds as collateral in the game they have just initiated, or else the game ends abruptly in a way they won't allow.
think of it this way. let's say you have 2 homes and want to take out a 200k home loan. one house is in detroit (hopefully worth 200k), and the other an apartment in midtown manhattan (definitely worth > 500k). the bank says they need a lien against either one for your loan. of course you "post as collateral" the detroit place. what kind of idiot would post the manhattan apartment??? in other words, what idiot would post german debt as collateral if they had any italian bonds on their balance sheet?
Well, that's in theory, if you try to pay with a 200 euro bill, stores don't want them in general, and they are associated to criminal activity
You mean the criminal activities of the issuers, right?
I would be surprised if the Fed started another QE before the election next year... The last thing Obama needs is another massive bail out on his record...
Monti Python Flying Pasta
You didn't understand how fascism worked? (here's some help: http://en.wikipedia.org/wiki/Italian_Fascism)
Rally on Wayne!
"Shyeah, as if!"
Did someone check the maturities of the 40 bln bonds?
Damn Pete, its taken you 3 days to figure this out.
Of course the problem is bigger than anyone wants to realize or deal with.
" Rather than being a new source of funds for Italian debt (the most optimistic view of LTRO) it created new debt?
Um.. was there any doubt about that at any point in the process?
The market seems to like it. At the expense of sounding like a shmuck which I am about to do...if it is as bad as everyone is making it out to be why the rally....volume or no volume..
As long as the central banks and Fed can keep cranking out new zeros on their computer algorithms, it seems that we'll continue in this market fantasy. The real story however, is the exported inflation and death-by-a-thousand-paper-cut economy that most of the population are experiencing. That will eventually come to some real crisis, and it won't matter what the central banks are doing.
Good question. I see nothing shmuckish about it.
Because we are still in the fx and equity guy driven rally phase who are then shocked when credit markets don't follow up. Italian bonds are weaker. For now data in us strong too.
We hit 1285 or something on day of grand plan. Was market right then? Who knows and not a dumb question but market has been wrong a lot on European plans
Puru Saxena, a very bright asset manager out of Hong Kong, put it this way in a Jim Puplava interview this week.
The dumbest money is in the equities markets and the smartest in the credit. Commodites are somewhere in the middle.
Is it really debt if no one has any intention of paying it back? Also, Peter said, "How will the market gain confidence in Italy and buy their debt when you don't know how much debt is outstanding." Don't all countries lie about the size of their debt? Does anyone here believe U.S. debt is really only $15 trillion?
Does anyone here believe U.S. debt is really only $15 trillion?
It depends on what the definition of debt is. TPTB conveniently isolate certain known liabilities because, well because they can.
Same with Greece. But markets always ignore until one day it doesn't
Unless WTI goes down to $60 and Brent down to $80, nobody will print anything. Hence, just check sudden "unexplainable" drops of crude prices during Q1 2012.
Look again. The spread has been narrowing. After firmly moving from $20 to ten, and holding there for a while, it broke and is closer to $8 as of this moment...
Major Divergence between credit and equity anyone?.. take your pick, mathematical reasoning or bernank magic pixie dust?
sorry now I am completely lost...
There has been a major divergence between dredit and equity for 2 years. The dow is over 12,000 and the ten year is 1.9%. The dow says things are great and the ten years says "It's coming right at us!".
True, but is it really a divergence or the trend? In 1982 the ten year was 15% and the S&P was at 120. Lower rates seems to equal more leverage.
The dow is over 12,000
12000 what? Monopoly money?
We won't know until the game is over and we try to take it to the candy counter...
That wasn't a Monopoly rib roast I bought for Christmas dinner with that monopoly money.
"I am scared..."
Hearing these words from pros like Peter Tchir leads me to think that Eurozone efforts are not restoring as much confidence to markets as was desired.
But, maybe it's just me.
Portugal's finest also realised that xmas came early this year. Long live the europonzi!
Dec. 23 (Bloomberg) -- Caixa Geral de Depositos SA, a
Portuguese state-owned bank, said it issued 2.8 billion euros of
three-year bonds guaranteed by the Portuguese state, according
to a regulatory filing.
So the sov and bank crisis is far worse than we know
I said dredit. I meant credit but dredit sounds better
If you can't pay your existing credit card balance but your bank increases your limit then why not charge some more? Of course the big Italian banks can use the same rationale. If we go down then the game is up for the Euro as well so why not live for today because there is no tomorrow.
your bank increases your limit then why not charge some more?
oh yeah, take out enough cash for the minimum payment plus smokes and a 6 pack!
Bring on the big bazooka with the fiat pached bullets
-----------------------------------------------------------------------
SPIEGEL spoke with two leading German economists about the currency's future:
SPIEGEL: So the ECB will have to bring out the bazooka, after all?
Starbatty: Inflation is always the long-term consequence of government financing through the central bank. If the ECB takes the same amount of paper and simply prints larger numbers on it, it is tantamount to counterfeiting.
Bofinger: Where would money be printed? What are you talking about?
Starbatty: The bazooka means nothing other than printing money.
http://www.spiegel.de/international/business/0,1518,804700,00.html
Quite funny really. There was a shortage of Government Bonds in the 1990s as issuance dropped and Synthetic Treasuries were manufactured from MOrtgages and CDOs to provide AAA Bonds for the huge liquidity backwash from Chinese trades surpluses and now we have Banks manufacturing Sovereign-backed Collateral to raise funding from the ECB to fund their Government deficits.
The Circularity of these Ponzi Schemes is truly bemusing, largely because the stupid financial press doesn't know anything beyond recycling press releases
No one wants to print. So they create these schemes to obfuscate and the deranged buy it. When they decide to print then a solution will be at hand. It's not a good one but at least they will admit that inflation is the only way out of this debt mess. That is if no one wants to embrace austerity.
Italy has been "Full Monti" since the Romans ruled. Like this is something new?
http://vegasxau.blogspot.com
Tyler .. I believe the GBT 10 year as the most important Bond in the world right now. Everything rests upon it.
Right.
Peter is a bit thin on his references, but rambles on regardless.
>> "It was just a little footnote to the LTRO announcement. Just a little statement that 40 billion of the collateral received by the ECB was newly issued, newly guaranteed Italian debt. "
Link please ...
The above claim seems to be incorrect, as it is not in the ECB announcement of the LTRO of EUR 489 B of 2011-12-08, see http://www.ecb.europa.eu/press/pr/date/2011/html/pr111208_1.en.html ...
>> "The ECB claims they have 40 billion of Italian government bonds on their books from the LTRO."
idem ditto: link please ...
>> "The banks say they pledged 40 billion of Italian government debt."
idem ditto: link please ...
Both are of course quite possible if those banks are Italian; but again: where did 'they' say that?
>> "The Italian government doesn't acknowledge it as debt."
idem ditto: link please ...
Nuff said.
And while we are scowering the Italian BS for the "lost" 40b Euro of debt, we can also check up to see if the redemption of that Greek 2.5b Euro that was to be paid out on the 19th of Dec is still "lost". I also wonder if the remaining 5.2b EUro of that "special" 0 coupon bond issue will be paid out on the 29th of December, or it that too will get "lost".
It appears that a lot of Euros have been getting lost lately. Hope the PSI's have some good insurance:)
" 40 billion of the collateral received by the ECB was newly issued, newly guaranteed Italian debt."
Second derivative fiat: debt that is backed by fiat money
All Italian debt is fiat.
Well, Italian debt is definitely not Ferrari or Lamborghini or Maserati :-)
Cheap joke, was there for the taking
You are "scared" that the sovereign debt problem is bigger than you thought? I am scared that you are extremely naive and clueless about the criminals who run Europe and the size of the Ponzi they have created, and are continuing to enlarge.
And the 'financial tectonic plates' keep slowly grinding against each other, building up even more pressure.
Eventually it's all going to blow up and the entire world will experience a gigantic economic collapse.
these emissions really raise a lot of suspicions. Here you could find something interesting on which to further elaborate .
Surprisingly, all the emisisons had a 3m maturity instaed of 3Y, which would have been more reasonable given the ECB financing has a 3Y maturity in theory. So, this is a crucial point to be investigated. Our finding is that it seems that 3m maturity was due to economic reasons.
Indeed, Monti’s austerity plan, which introduced these guarantees, explicitly refers to two methods of calculating the fee for state guarantee, depending on the date of issue:
1) between entry into force of the plan (it was a Gvt decree, then entered into force immediately prior to final approval yesterday in the Senate) and December 31, 2011 the calculation is to refer to European standards issued after Lehman in 2008;
2) after December 31, 2011 the calculation is a fixed percentage (0.4% per annum + average CDS last three years for maturities beyond 12 months, 0.5% + 0.2% increasing to 0.4% depending on credit rating for maturities less than 12 months).
We therefore conclude that the fee calculated in accordance with European criteria of 2008 are much more expensive, at least for maturities less than 12 months.
--------
However, it is true that the real news on these emissions is that they have not been placed on the market, ie they are at no cost to the issuing banks apart from the cost of the guarantee and the cost of ' 1% to be paid to the ECB.
The emission of bonds made after lehman, like Tremonti bonds, were underwritten by the Italian Treasury with rates close or higher than market ones, while in this case they actually are a state signature guarantee in favour of Italian banks, which the banks have used to obtain cash from ECB at the cost of '1%.
Thus, the total cost of these emissions, once converted into cash with the ECB, would be less than 2% per annum if they had already applied the calculation method post December 31, 2011! -
At this point the question is whether at maturity or after December 31, 2011, Italian banks may renew these emissions or issue new virtual bonds with the same scheme, ie without physically placing them on the market.
The European Commission or other banks may argue that in this way (without placing on the market but with using ECB) Italian banks are unfairly favoured. To date, in fact, it does not appear that other banks outside of Italy have used a similar scheme (some friends of mine have just informed us that only Portugese banks did the same). If these emissions were normally placed, their cost would be much higher probably having to apply the calculation pre December 31.