In a striking admission that Mario Draghi's "strategy" about the ECB's Private QE future, aka ABS monetization plan, is nothing short of converting Europe's central bank into a "bad bank" repository for trillions in bad and non-performing debt, the FT yesterday reported that "Mario Draghi is to push the European Central Bank to buy bundles of Greek and Cypriot bank loans with “junk” ratings, in a move that is set to exacerbate tensions between Germany and the bank." It is expected that the former Goldmanite will unveil details of a plan to buy hundreds of billions of euros’ worth of private-sector assets at tomorrow's ECB meeting.
The ECB’s executive board will propose that existing requirements on the quality of assets accepted by the bank are relaxed to allow the eurozone’s monetary guardian to buy the safer slices of Greek and Cypriot asset backed securities, or ABS, say people familiar with the matter.
Mr Draghi’s proposal is designed to make the programme of buying ABS, which are bundles of packaged loans, as inclusive as possible. If it is backed by the majority of members of the ECB’s governing council, the central bank would be able to buy instruments from banks of all 18 eurozone member states.
However, the idea is likely to face staunch opposition in Germany, straining already tense relations between the ECB and officials in the eurozone’s largest economy. Bundesbank president Jens Weidmann, who also sits on the ECB’s policy making governing council, has already objected to the plan to buy ABS, which he says leaves the central bank’s balance sheet too exposed to risks.
While admirable, at least for those who follow the Keynesian religion, Draghi's revelation will come two days after Europe just reported the lowest inflation in the Eurozone since 2009: something which apparently is bad for the common person, when in reality ordinary folks couldn't be happier that their saving would be worth more tomorrow than today. It is only the massively bloated, indebted public and private insitutions that are desperate for the ECB's to unleash a raging inflation inferno that will wipe away the value of the debt crushing their equity.
While the safer slices – or senior tranches – of Greek and Cypriot ABS only make up a tiny proportion of Europe’s securitisation market, it would free up billions in liquidity for banks in two of the eurozone’s weakest economies, and potentially boost lending to credit-starved smaller businesses in the currency area’s periphery.
The reason the ECB is limited currently in its injection of liquidity into insolvent Greece and deposit-confiscating Cyrpus is because currently "the ECB only accepts ABS as collateral in exchange for its cheap loans if they hold a minimum rating of at least triple B, the lowest investment-grade rating. The ratings on senior tranches are capped by the sovereign rating of the country where the bank is based. If those rules were to apply to the ECB’s buying plan, the central bank could not accept any securitisations of Greek or Cypriot issuers. Standard & Poor’s rates Greece and Cyprus as single B sovereigns – a sub-investment-grade rating. Fitch rates Greece as single B, and Cyprus as single B-minus. Moody’s rates Greece Caa1 and Cyprus as Caa3."
Sadly, it was never the intention of the ECB to boost lending; the Frankfurt bank which is about to become the Frankfurt bad bank has only one focus - how to backstop and, if possible, eliminate several hundred billion in bad loans in Greece alone (and over a trillion around the Eurozone). Bloomberg explains the problem as was framed by Zero Hedge back in 2012:
To Aristides Belles, it’s clear what’s blocking Greece’s recovery: a quiet build-up of about 164 billion euros ($208 billion) in bad loans.
“The inability of Greek companies to repay their loans to banks and their dues to the state is clearly holding back Greece’s return to growth,” said the chief executive officer of Athens-based Nireus Aquaculture SA (NIR), a producer of sea bream, sea bass and processed fish. “It’s more necessary than ever for all parties involved -- banks, corporates and the state -- to agree on an arrangement.”
As Greece and its euro-area creditors meet tomorrow to prepare for talks on repayment terms for its public debt, a less-visible crisis is looming on another front: bad debts of households and companies. The borrowings, amounting to about 90 percent of Greece’s gross domestic product, are weighing on the country’s hopes of recovering from the steepest and longest recession on record.
Non-performing loans at Greece’s banks have reached almost 80 billion euros, according to the country’s Growth and Competitiveness Minister Nikolaos Dendias. To top that, Greek households and corporations had overdue taxes of 69.2 billion euros in August, data from the public revenue secretariat show. Also, “collectible” social arrears to pension funds exceed 14.5 billion euros, according to labor ministry figures.
“Some of this debt can never be recovered and should be written off,” said Panos Tsakloglou, a professor at the Athens University of Economics and Business who was Greece’s representative in the working group of senior euro-area finance ministry officials until June.
Sadly, if one country starts writing off the bad debt, and there is lots of it, all countries will start writing off the bad debt, and next thing you know you have a Cyprus bail in which sucks in trillions in deposits to finally match the bank books for what a viable balance sheet should look like. Of course, if instead the ECB were to step in and somehow monetize said debt, then all would be well
A perfect plan, some would say. Maybe, but not "ze Germans"
According to Handelsblatt, Germany was quick to throw up all over the German proposal, saying that EU officials see “widespread concern” among EU countries about ECB asset backed security program.
The Germany publication made it quite clear how the Germans feel: "Germany rejects Draghi’s pledge for govt-backed guaranties for ABS purchase; "that won’t happen,” the newspaper cites an unidentified govt official as saying. Finland, Netherlands oppose ABS-plans; France rejects giving guarantees
Former ECB chief economist Juergen Stark reiterates the ECB will take on enormous risks with ABS purchases and transform itself into a European “bad bank”, Handelsblatt cites him as saying
So with the ECB bankers set to meet tomorrow, watch for sparks starting to fly, unless of course, Germany is once again just doing the good cop, bad cop routine. After all, let's not forget that the one bank which will be in biggest need of a bad bank ECB is none other than the bank with the greatest notional derivative exposure in the world: Germany's own Deutsche Bank.