Mish's Global Economic Trend Analysis

Trichet Repeats Nuclear Threat to Reject Greek Bonds as Collateral; Verbal Discipline or Big Bluff?
Details Cast More Suspicion on Latest European Bank "Stress Tests"
Ireland Deputy Prime Minister Requests "Nanny State" Common Bond Solution to Solve Crisis; ECB Policymaker Weidmann, Opposes Common Bond Solution

Trichet Repeats Nuclear Threat to Reject Greek Bonds as Collateral; Verbal Discipline or Big Bluff?

Posted: 17 Jul 2011 08:18 PM PDT

For the nth time, Trichet says ECB would reject Greek bonds as collateral.

"If a country defaults, we will no longer be able to accept its defaulted government bonds as normal eligible collateral," he told the newspaper in an interview to be published in its Monday edition.

"The governments would then have to step in themselves to put things right ... the governments would have to take care the Eurosystem is presented with collateral that it could accept."

"There is an absolute need to improve 'verbal discipline'. The governments need to speak with one voice on such complex and sensitive issues as the crisis," Trichet said.

Verbal Discipline or Big Bluff?

Does anyone believe Trichet? Would the ECB dump its holdings of Greek bonds in a panic market?

I am suspicious about the wording "normal eligible collateral".

What about abnormal collateral, conditional collateral, temporary collateral?

The idea that verbal discipline works is nonsense. One look at sovereign debt yields in Greece, Ireland, Spain, Portugal, and Italy is proof enough.

I believe Trichet will look for some excuse to not dump Greek bonds into a panicked market should the rating agencies rule Greek debt in default. Regardless, the sooner the market puts Trichet's verbal discipline to the test, the better off Europe will be.

If Trichet is really serious, so be it. A Greek default will not be the end of the world.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Details Cast More Suspicion on Latest European Bank "Stress Tests"

Posted: 17 Jul 2011 03:36 PM PDT

As stress test detail come in, the more ridiculous the latest results look.

For example, the four largest French banks have $425 billion in loans to institutions and individuals in Portugal, Ireland, Italy, Greece and Spain. That is on top of whatever sovereign debt they are holding.

Please consider the Wall Street Journal report It Isn't Just Sovereigns Stressing Europe's Banks

During Europe's 15-month financial crisis, investor and analyst fears have centered largely on banks' holdings of sovereign debt issued by governments in financially shaky countries such as Greece, Ireland and Portugal. If those countries were to default, it could saddle banks and other holders of their bonds with big losses.

But Friday's test results shed light on another potential problem for Europe's banks: huge piles of residential mortgages, small-business loans, corporate debt, and commercial real-estate loans to institutions and individuals from ailing countries. As those economies struggle, the odds of rising defaults grow.

As of Dec. 31, its four largest banks—BNP Paribas SA, Crédit Agricole SA, BPCE Group and Société Générale SA—were holding a total of nearly €300 billion ($425 billion) in loans and other debt issued to institutions and individuals in Portugal, Ireland, Italy, Greece and Spain, the countries that are among Europe's most troubled. That's largely a result of some of the French banks having big retail- and commercial-banking operations in Greece, Italy and Spain.

The French banks' portfolios of commercial and retail loans in those countries dwarf their holdings of sovereign debt. For example, the four banks have a total of about €51 billion of loans to Spanish customers, according to the Journal's analysis. That compares with about €15 billion of Spanish sovereign debt, according to a separate analysis of stress-test data for the Journal by research firm SNL Financial. In Greece, whose economy is in a tailspin, the French banks have €33 billion of various types of loans, more than three times their sovereign-debt holdings.

It's a similar story in Germany. The dozen German banks that disclosed their stress-test results were exposed to €174 billion of commercial and retail loans to Greek, Irish, Italian and Spanish borrowers as of Dec. 31. They are holding an additional €70 billion of sovereign debt issued by those countries, according to SNL.

Some banks opted not to disclose details of their loan portfolios. For example, Lloyds Banking Group PLC is in the process of shutting down its Irish banking business, which has cost the big British bank billions of pounds in loan losses. But in its stress-test materials on Friday, Lloyds didn't provide a breakdown of loans to countries other than the U.K. and the U.S.

A Lloyds spokeswoman said the bank's Irish loans are included in a catch-all category marked "other."

Banks can only get away with the catch-all "other" bucket if loans represent 5% or less of a bank's portfolio. So why does Lloyds want to hide the details?

Regardless, the main problem is a mountain of debt in all the wrong places: Greece, Ireland, Portugal, and Spain. The odds of all of that debt being paid back when the economies of those countries are in shambles is roughly zero percent.

For more on the stress test sham, please see More BullSweet Stress-Free Tests of European Banks

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Ireland Deputy Prime Minister Requests "Nanny State" Common Bond Solution to Solve Crisis; ECB Policymaker Weidmann, Opposes Common Bond Solution

Posted: 17 Jul 2011 06:54 AM PDT

The battle lines are forming for and against "nanny state" common bond solutions that would have German taxpayers covering the liabilities of other countries in a so-called "transfer union".

Please consider Ireland seeks euro bonds as part of crisis solution

Ireland would like to see the euro zone issue common bonds as part of the solution to the bloc's debt crisis, the Irish deputy prime minister said on Sunday.

Euro zone leaders will meet in Brussels on Thursday to discuss ways of halting the threat of contagion to Italy and Spain from Greece's rumbling debt crisis.

Gilmore said it was to Ireland's advantage that European leaders were now looking at the crisis as a euro zone problem rather than an issue for individual countries.

"I believe that will work to Ireland's advantage because solving the European problem will help solve the Irish problem."

Ireland hopes a new plan to tackle the crisis will mean the terms of its own 85 billion euros ($120 billion) EU-IMF bailout package will be loosened, including a cut in the average 5.8 percent interest rate on its European loans and longer loan maturities.

Euro zone finance ministers agreed last week to make the European Financial Stability Fund (EFSF), the euro zone's rescue fund, more flexible, but the details have yet to be worked out.

ECB Policymaker Weidmann, Opposes Common Bond Solution

Please consider Greek debt cut won't solve problem: ECB's Weidmann

Cutting Greece's debt will not solve the country's problems, ECB policymaker Jens Weidmann was quoted as saying on Sunday, adding Athens needed to raise its productivity instead.

"Greece consumes considerably more than it produces, the public budget shows high deficits," Weidmann, head of Germany's Bundesbank and who sits on the European Central Bank's Governing Council, was quoted as saying.

"As long as that doesn't change, a hair cut will not really improve anything," he said, Bild am Sonntag newspaper reported.

On Saturday, German magazine Der Spiegel reported -- citing unnamed German finance ministry sources -- Greece could cut its public debt by 20 billion euros ($28.2 billion) if it bought back sovereign bonds at market prices as part of a rescue.

Wolfgang Franz, head of Germany's "wise men" economic advisers, told Focus magazine on the weekend a hair cut was "inevitable and justified."

"One possibility would be that the current EFSF euro rescue mechanism swaps -- at a significant discount -- Greek bonds into bonds it issues and guarantees," Franz was quoted as saying.

The ECB has signaled it remains fiercely opposed to any form of default. The bank is fearful the problems that have hurt Greece, Ireland and Portugal could spread to other indebted euro zone members if a default were triggered.

Weidmann also said he opposed common euro zone bonds.

"The result would be that European, especially German, taxpayers must cover Greece's state debt. That would be a step into the transfer union that Germany has rightly rejected so far," he said.

Right Place to Crash the Plane

I have talked about the European Nanny State Eurocracy on several occasions, mist recently yesterday, so it is interesting to see these stories today. For an up-to-date recap of the growing support for the Nanny State, please see Right Place to Crash the Plane; Time Running Out for Europe; Nanny State or a Breakup?

In general, Germany is opposed and countries deep in trouble are for common bonds. However, common bond and fiscal unions are against the Maastricht Treaty that created the European Union.

So far Jean-Claude Trichet has treated the treaty like toilet paper, but Trichet will be gone in October, and changes like common bonds and a fiscal union are well beyond rule changes the ECB could get away with.

The big Nanny State clash is coming.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Home Refinance Calculator

Sunday, July 17, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

No comments:

Post a Comment