Europe's Ponzi Takes A Twist For The Wacky: Greek Bank Equity To Be Used As Loan Collateral

That the European ponzi is leaps and bounds ahead of the US is well known: we have frequently succumbed to vertigo trying to chart just how interconnected Europe's financial system is at the current point where €1 in incremental capital is supposed to prop up a multi-trillion pyramid scheme. But the just released news from the Handeslblatt demonstrates that just when we thought we had seen it all, Europe once again manages to surprise us. As is by now well-known, Finland has proven to be quite a stick in the spokes of the joint-European can kicking exercise by, prudently, demanding collateral, or threatening to walk out of the second Greek bailout (that 1 year Greek bonds are trading at 60%+ yields is irrelevant). Well, here's the solution - give them collateral... in the form of insolvent Greek bank shares, which however will be "partially nationalized" as if that will suddenly push their value higher. Supposedly the Finns never clarified that the collateral has to have some liquidation "value."  Oh well, better luck next time.

Dow Jones provides a brief summary of idiocy so profound we are terrified we have lost our minds and fail to see brilliance when it stares us in the face:

According to the report, European Financial Stability Facility head Klaus Regling has proposed the idea to European finance ministers, who will discuss the matter early next week. Regling's office didn't have an immediate comment on the report Tuesday.


Of the EUR109 billion expected to make up the euro zone's second rescue package for Greece, at least EUR20 billion is earmarked for Greek banks, according to Handelsblatt.


In return for getting the aid, Greek banks will be partially nationalized, the article quotes unnamed sources in Brussels as saying.

And straight from the horse's mouth:

The euro zone remains committed to the project to secure the new loan assistance for Greece with a mortgage. According to the Handelsblatt information is now thought to get Finland and other donor countries Greek bank shares as security deposit. It was Klaus Regling, head of euro bailout EFSF, the group suggested the euro finance ministers, said EU diplomats. Senior officials from the ministries of finance-€ would talk about it early next week.


The second aid package for Greece in the euro area comprises a total of 109 billion euros. Of these, at least 20 billion euros for the Greek banks determined. In return for the assistance of the Greek banks were partially nationalized, it said in Brussels. The state share packages should be left to the government in Athens the Euro-donor countries as a security deposit, according to the plan.


The Government of the Euro-zone was at the urging of Finland at its extraordinary meeting on 21 July, the security deposit resolved. Greece agreed then Finland, € 925 million in securities with high credit ratings to a Finnish account as collateral to apply. The euro-zone would then approve this agreement, however. This is not to the security deposit but from the table, it said in Brussels.


Finland continues to insist, so now another solution must be found. Otherwise, there is a danger that Finland is on the new loan package for Greece no longer participate. The government in Helsinki is under considerable pressure of the opposition party "The True Finns" who refuses all aid to Greece.

So let's see if we can make sense out of this:

Greek banks exist only due to the National Bank of Greece funding their operations by providing cash in exchange for Greek bonds as collateral; Greek bonds are trading at or around 50 cents on the dollar, which however results in nearly par cash; the NBG goes and pledges the same Treasuries to the ECB, in another collateralization operation. However, even that has failed to satisfy the full Greek bank system capital shortfall (remember that whole bank run and collapse in bank deposits?), and a €20 billion gap has opened up, which is where Bailout #2 is happening. The issue is that Greek banks can not offset selling interest and the SMP is forced to buy up eligible collateral which means there is a liquidity crisis. The only thing that could help this would be a greater deficit, which would be funded with more issuance, yet the IMF is forcing Greece to slash its budget deficit, thus substantially reducing future bond issuance, and repoability by local banks with the ECB, as final NBG-intermediated, counterparty. So instead the country's banks need direct foreign capital. However, this capital needs hard collateral pledged. Collateral which would have value in a worst case scenario, i.e., liquidation. Instead, what the EFSF has offered as "collateral" is the equity of the very same firms which will be immediately insolvent once this house of cards collapses, sending the bank equity collateral worthless, and buried under billions of debt liabilities, and in turn impairing the ECB which suddenly finds itself with hundreds of billions in worthless Greek paper, making additional funding for Finland, once it finds itself in a liquidity crisis, next to impossible.

That pretty much sums it up?

We have just one question: why will Finland agree to this again?

All joking aside, we are confident that this being the first bid in a compromise negotiation, Finland will likely end up with Greek bonds as collateral... which however are collateralized with even more worthless assets, and trade at 30-40 cents on the dollar, and as a result of this claim dilution, trade even lower, which in turn will force Finland to demand an 80% collateral haircut on Greek bonds, which kills the whole process as it makes a mockery of the ECB holding Greek debt at par. But fear not: Trichet said the ECB is not a bad bank and holds highly valuable assets.

Whoever said watching massive ponzi scheme unwind is not entertaining obviously had no idea what they are talking about.