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German banks reduce their exposure in Greece According to Financial Times Deutschland German banks have reduced their exposure in Greece significantly in recent months. Citing Bundesbank statistics the paper claims German financial institutions held 10 bn at the beginning of this year down from 16 bn in April 2010. German banks reduced their exposure by 4bn, 2bn of Hypo Real Estate are no longer accounted for in these statistics because they are now in a specifically designated bad bank. The paper points out that the banks reduced their exposure despite an informal standstill agreement in which they pledged to keep their exposure constant. According to those statistics the French banks are still the most exposed on Greece with government bonds worth 11.2 bn.
According to Financial Times Deutschland German banks have reduced their exposure in Greece significantly in recent months. Citing Bundesbank statistics the paper claims German financial institutions held 10 bn at the beginning of this year down from 16 bn in April 2010. German banks reduced their exposure by 4bn, 2bn of Hypo Real Estate are no longer accounted for in these statistics because they are now in a specifically designated bad bank. The paper points out that the banks reduced their exposure despite an informal standstill agreement in which they pledged to keep their exposure constant. According to those statistics the French banks are still the most exposed on Greece with government bonds worth 11.2 bn.
Meanwhile, the boss of the Bundesbank spoke out against Schäuble's idea (in an op-ed which echoes the diary title in its main thesis):
German insurers halved their exposure to the sovereign debt of Greece in the year to March and slashed holdings in Irish, Portuguese, Spanish and Italian debt, according to a report for Germany's parliament. Their exposure to Greek debt fell to 2.79 billion euros in March 2011 from 5.83 billion a year earlier; Irish debt holdings fell to 3.89 billion from 7.13 billion; Italian debt to 20.04 billion from 27.79 billion; Portuguese debt to 2.79 billion from 4.50 billion and Spanish to 9.06 billion from 20.93 billion. The data came from a report on German insurers' exposure to sovereign debt prepared for the finance committee of the lower house or Bundestag, which was obtained by Reuters on Thursday.
Their exposure to Greek debt fell to 2.79 billion euros in March 2011 from 5.83 billion a year earlier; Irish debt holdings fell to 3.89 billion from 7.13 billion; Italian debt to 20.04 billion from 27.79 billion; Portuguese debt to 2.79 billion from 4.50 billion and Spanish to 9.06 billion from 20.93 billion.
The data came from a report on German insurers' exposure to sovereign debt prepared for the finance committee of the lower house or Bundestag, which was obtained by Reuters on Thursday.
So, they have cut their own hair... sadly, this is of no benefit to the debtor nations.
It follows that the ECB is now stoutly defending the speculators who buy the bonds at steep discount, gambling that they will be repaid in full (or with a modest haircut, at worst).
So, the original lenders (the bond purchasers) have, to a great extent, been punished for their profligate lending. The citizens of the debtor nations are being punished for their profligate borrowing. The reason this is all so painful is that there is a moral imperative to pay in full the only good guys in the affair : the bond speculators.
Have I got that right? It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
Yesterday's Briefing This morning France 0.337 0.328 Italy 1.801 n/a Spain 2.422 2.429 Portugal 7.930 7.527 Greece 13.839 13.526 Ireland 8.066 7.686 Belgium 1.144 1.099 Bund Yields 3.026 2.996
If they held the bonds in an investment book on hold-to-maturity-accounting, they did indeed realise losses. Economics is politics by other means
- Jake Friends come and go. Enemies accumulate.
Is this inherently unknowable, because of the nature of the markets?
Can it be inferred or deduced in some way?
Any informed speculation as to who are these speculators? It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
Outstanding amount * mil. 74,912 Date 10 Jun. 2011 * Settled amount as of given date
The outstanding amount at end 2010 was 4.8 billion (quoted here)
So the ECB has been very, very busy buying up distressed bonds at hefty discounts. Is the ECB the main creditor of the Greek government? It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
The private sector has now had its haircut. The ECB can commence with the rolling over at par.
Time to dust off the embarrassing photos of Trichet, or the stress tests of German banks...
Greek 10 year bonds are now trading at 17.73% interest rate. Two year notes are at 28.15%. Somebodies are going to make a whacking pile of money using this in the Dollar/Euro Carry Trade. She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
Instead ...
LOOK!
It's a Bright Shiny Object!
(cool) She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
Granted, but if you buy CDS protection it's because you expect to be paid in case it is triggered, right?
Right?
Um...
the whole point of CDS swaps was to enable you to treat risky junk as though they were AAA investments and relieve you of the obnoxious reserve requirements
Okay, let's parse this.
The following table applies for its risk-weighting:
Claims on sovereigns and their central banks will be risk weighted as follows: Credit AssessmentAAA to AA-A+ to A-BBB+ to BBB-BB+ to B-Below B-UnratedRisk Weight0%20%50%100%150%100%
Capital is 8% of risk-weighted assets.
So... take a Greek bond.
Before the crisis started, Greece was in the category where its bonds had a risk weighting of zero. So, holding a Greek bond costed no capital.
Now, Greece is rated below B, so its risk weighting is 150%, so the capital charge is 8% times 150% or 12% of notional.
You can buy a CDS at a 16% annual premium. The capital charge for the AAA CDS is 8% times 20% or 2%.
So, does it pay to free up 10% of notional from the capital charge, at the expense of 16% annually in CDS premia? I don't think so. Economics is politics by other means
What? Economics is politics by other means
Covered Bond Purchase Programme Outstanding amount * mil. 60,268 Date 14 Jun. 2011 * Settled amount as of given date
I linked the following FT blog by Emma Saunders, from 11 March. I picked up the covered bond purchase number (4.8 billion) instead of the securities markets programme number (13.1 billion), being the holdings of the ECB at end of 2010.
Eurosystem bond profit - correction | Money Supply | News, data and opinions on market-moving economics from the Financial Times - FT.com
To set the record straight, ECB national accounts show that the central bank held more like 18 per cent than 8 per cent of bonds bought to aid sovereigns in distress. 17.8 per cent of them as at end 2010, to be precise. At the end of December, the total stock of bonds purchased was 73.5bn, and 13.1/73.5 is 17.8 per cent.
(Sorry for the 10 billion euro difference.)
The takeaway point is that, in the 5-and-a-bit months to June 11, the ECB has increased its holdings in the securities markets programme phenomenally :
13 to 75 billion on the SMP (62 billion net purchases)
I've no idea what proportion of the stock of distressed sovereign bonds that represents... any ballpark numbers around?
So :
Businessweek: ECB Fails to Sterilize Bond Purchases With Deposits (December 29, 2010)
The European Central Bank failed to fully neutralize the extra liquidity created by its bond purchases for a second time since the program began in May. The Frankfurt-based ECB said today it drained 60.78 billion euros ($80.66 billion) from money markets via seven-day term deposits, almost 13 billion euros less than the 73.5 billion euros it intended to absorb. ... The central bank started buying government bonds on May 10 in an effort to restore confidence in markets rattled by the sovereign debt crisis. To ensure the purchases don't swell the money supply and create inflation risks, the ECB each week drains the amount of extra liquidity it has created by offering banks seven-day term deposits.
The Frankfurt-based ECB said today it drained 60.78 billion euros ($80.66 billion) from money markets via seven-day term deposits, almost 13 billion euros less than the 73.5 billion euros it intended to absorb.
...
The central bank started buying government bonds on May 10 in an effort to restore confidence in markets rattled by the sovereign debt crisis. To ensure the purchases don't swell the money supply and create inflation risks, the ECB each week drains the amount of extra liquidity it has created by offering banks seven-day term deposits.
The ECB failed to auction the 55bn in fixed term deposits it had planned to, and what it did auction (31.86bn) was at a much-higher rate (0.54 per cent) than what it offered at the start of its Securities Markets Programme (SMP). The market seems to be holding tight to liquidity.
2010 2009 Change Covered bond purchase programme 4,823,413,246 2,181,842,083 2,641,571,163 Securities Markets Programme 13,102,563,262 0 13,102,563,262 Total 17,925,976,508 2,181,842,083 15,744,134,425
which is probably an apples-to-oranges comparison (holdings/outstanding amount?)
So I got the wrong end of the stick, there has not been a massive buy-up of bonds by the ECB in 2011. They have either decided that the markets are correctly pricing the bonds (in contradiction with their "mark-to-book" policy), or have renounced market intervention (recognition that they are powerless?)
In any case, if the ECB holds 50B of Greek bonds, they were mostly bought in 2010, and that comes out to more than a third of the total of SMP holdings (75B) and CBP (60B), no? It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
The rest of the Securities Market Programme balance of 70 billion must be purchases by the National Central Banks.
The Eurosystem is a complicated monster. Economics is politics by other means
I've no idea what proportion of the stock of distressed sovereign bonds that represents... any ballpark numbers around? So : the ECB claims to be buying up these junk bonds because the market is dysfunctional, i.e. is improperly pricing in the risk of defaults which ALL serious people know to be impossible (which is why they are booked without impairment, as "hold to maturity" zero-risk securities!)
So : the ECB claims to be buying up these junk bonds because the market is dysfunctional, i.e. is improperly pricing in the risk of defaults which ALL serious people know to be impossible (which is why they are booked without impairment, as "hold to maturity" zero-risk securities!)
therefore the price of these bonds would be MUCH lower, and the yields higher, if the ECB did not intervene,
I want to understand whether the ECB is buying these bonds directly from the banks, or whether speculators bought the bonds from the banks, then took fright and sold on to the ECB (in the aggregate) : i.e. are the speculators getting a haircut too?
How does default insurance correlate to bond ownership? Is it necessary to own bonds in order to purchase insurance? Are the speculators buying insurance when they buy bonds?
If the bulk of Greek debt is now no longer held by banks, but by speculators who hold insurance, then when the price drops, their interest is best served by default, right? Or by full payment at term without rollover, but unserious people like these speculators know that this is impossible.
I've probably got hold of the wrong end of a stick that may not even exist; but I'm trying to follow the money here. And you people are writing my book for me.
You're grasping at straws with your "follow the money".
Guilty as charged...
I'm still looking for a tangible villain. Given the mechanical inevitability of default for Greece (barring a deus-ex-machina from the ECB, which I think we can agree is not on the cards), the smart money is presumably gaming the ECB's stupidity for all it's worth.
The most obvious way of doing this is by buying CDS.
Therefore, anyone taking a major bet on Greek default, through a CDS position, may wish to influence outcomes by blocking off all alternatives to full payment (impossible) or default (jackpot).
Ratings agencies which declare "anything which is different from full payment (e.g. voluntary rollover) is equivalent to default" would seem to fit with such a strategy.
The head of a ratings agency who secretly held a massive CDS position might make a satisfying villain.
Just thinking out loud here. It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
My head hurts. It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
If you sell insurance with no intention of paying out, is that not fraudulent? Economics is politics by other means
This is all a matter of parasitical side-bets on the main events of Euro liquidity/solvency matters, but the stakes are high.
It could all get quite violent. It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
Writing a crime novel is easy, comparatively speaking. But I would prefer that it were plausible and didactic in nature.
It's a variation on the old "insure and burn" scam. No, it's actually more like match-fixing : placing bets on outcomes, and reducing the uncertainties.
I would prefer if I could identify actors who stand to gain from the Euro crisis itself, rather than CDS side-bets, and who might therefore wish to influence outcomes. But I haven't identified anyone yet : it looks like a lose-lose-lose situation, a seriously negative-sum game. It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
Götterdammerüng, and lots of humping among the ruins. It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
I would prefer if I could identify actors who stand to gain from the Euro crisis itself, rather than CDS side-bets, and who might therefore wish to influence outcomes. But I haven't identified anyone yet : it looks like a lose-lose-lose situation, a seriously negative-sum game.
In terms of money? Certainly.
In terms of goods and resources? Absolutely.
In terms of power? No. Power over others is a zero-sum game.
But of course this is a case where reality is unrealistic. It is hard to make a character in a book motivated by power over other people without having him become a caricature sociopath.
If you sell insurance with no intention of paying out, is that not fraudulent?
That is the advantage for the buyer of having insurance regulated. But since this is not insurance, I guess pretending to insure would be the correct name of the service. Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
Capitalism: CDS buyers pretend to buy insurance and CDS sellers pretend to sell it.
Hm, not as catchy. Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
That's what I read somewhere last week; to the tune of 50 billion. *Lunatic*, n. One whose delusions are out of fashion.
Greece's total debt is 340 billion euros, according to data compiled by Bloomberg. The 7.4 billion euros in Greek government bonds held by FMS Wertmanagement, which is winding down assets of Germany's Hypo Real Estate Holdings, weren't included in the BIS figures because FMS isn't a bank. Neither were the holdings of the European Central Bank, or ECB, estimated at 50 billion euros by Citigroup. Greek banks own about 60 billion euros of the country's debt, according to Goldman Sachs.
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