by Tyler Durden
November 19, 23011
"Nervous investors around the globe are
accelerating their exit from the debt of European governments and banks,
increasing the risk of a credit squeeze that could set off a downward
Financial institutions are dumping their
vast holdings of European government debt and spurning new bond issues
by countries like Spain and Italy. And many have decided not to renew
short-term loans to European banks, which are needed to finance
So begins an article not in some
hyperventilating fringe blog, but a cover article in the venerable New York
Times titled "Europe Fears a Credit Squeeze as Investors Sell Bond
Said otherwise, Europe's continental bank run in
which virtually, but not quite, all banks are dumping any peripheral
exposure with reckless abandon is now on.
Granted, considering the epic collapse in bond
prices of Italian, French, Austrian, Hungarian, Spanish and Belgian bonds
which all hit record wide yields and spreads in the past week, and
furthermore following last week's "Sold
To You": European Banks Quietly Dumping €300 Billion In Italian Debt"
which predicted precisely this outcome, the news is not much of a surprise.
However, learning that everyone (with two
exceptions) has given up on Europe's financial system should send a shudder
through the back of everyone who still is capable of independent thought -
because said otherwise, the world's largest economic block is becoming
unglued, and its entire financial system is on the edge of a complete
And just to make sure that various fringe
bloggers who warned this would happen over a year ago no longer lead to the
hyperventilation of the venerable NYT, below, with the help of Goldman's
Jernej Omahan, we bring to our readers the complete annotated and
abbreviated beginner's guide to the pan-European bank run.
But first some more details
from the NYT:
The flight from European sovereign debt and
banks has spanned the globe.
European institutions like the Royal Bank of
Scotland and pension funds in the Netherlands have been heavy sellers in
recent days. And earlier this month, Kokusai Asset Management in Japan
unloaded nearly $1 billion in Italian debt.
At the same time, American institutions are pulling back on loans to
even the sturdiest banks in Europe.
When a $300 million certificate of deposit
held by Vanguard’s $114 billion Prime Money Market Fund from Rabobank in
the Netherlands came due on Nov. 9, Vanguard decided to let the loan
expire and move the money out of Europe. Rabobank enjoys a AAA-credit
rating and is considered one of the strongest banks in the world.
American money market funds, long a key supplier of dollars to European
banks through short-term loans, have also become nervous.
Fund managers have cut their holdings of
notes issued by euro zone banks by $261 billion from around its peak in
May, a 54 percent drop, according to JPMorgan Chase research.
Is this setting familiar to anyone?
"Experts say the cycle of anxiety, forced
selling and surging borrowing costs is reminiscent of the months before
the collapse of Lehman Brothers in 2008, when worries about subprime
mortgages in the United States metastasized into a global market
Ah, but there is one major difference: last time
around, the banks were not all in on the wrong side of the world's worst
poker hand (as described by Kyle Bass earlier). Now they are.
And should Europe's banks begin a domino-like
spiral of collapse, there will be nobody to bail out first Europe, then
Japan, then China, then the US and finally the world.
But lest someone suggest this is merely the deranged ramblings of yet
another blogger, here is Goldman Sachs with a far more cool, calm and
collected explanation for why we should all panic (which comes at the
sublime moment: just as Goldman takes over all the key political locus
points of the European continent: more on that in the conclusion...)
Core’ banks cut GIIPS debt by €42 bn (-31%) in 3Q
- A manifestation of PSI side-effects?
In 3Q2011, banks from the ‘core’ cut
their net GIIPS (alternative spelling of
PIIGS) sovereign debt holdings by €42 bn (or by one-third),
French and Benelux banks cut their exposures
most, by €21 bn and €9 bn, respectively. GIIPS portfolios remained
unchanged with periphery banks.
Greek PSI sets a risky precedent, in our
view, as the prospect of ‘voluntary’ haircuts becoming a template for
GIIPS crisis resolution could drive exposure reduction.
Core banks now have €88 bn of GIIPS
sovereign bonds remaining. We expect this to decline.
Problematically, we observe that GIIPS bond
reductions are not resulting in ‘core’ bond purchases but in a rise in
deposits at the ECB.
The disposal of GIIPS sovereign debt
accelerated during 3Q2011, and we highlight the following.
Banks cut net GIIPS sovereign
exposure by €43 bn.
The largest reductions relate to Italian
(€26 bn), Spanish (€7 bn) and Greek (€7 bn) net sovereign debt
Almost all of the reduction (€42 bn)
came from banks in the European ‘core’, where the GIIPS bond
positions therefore fell by just over one-third (31%).
same time the banks from the ‘periphery’ kept their exposures
French (€21 bn) and Benelux (€9 bn)
banks reduced their exposure most.
Individually BNP (€12 bn), KBC (€4.4
bn), SG (€4.1 bn), BARC (€3.5 bn) and ING (€3.5 bn) cut the net
sovereign exposures most, in absolute terms.
We expect this trend to extend into 4Q and
to ultimately lead to a long-term reduction GIIPS bond holdings by core
Greek PSI - and the ‘voluntary’ 50% haircut - has changed the risk
perception of GIIPS bonds. We believe it has allowed for an assumption
that PSI will be used as a template in helping other GIIPS sovereigns
improve their public finances. Such intention is denied by policy
makers. Banks, on the other hand, express their view of the likelihood
of such an event through the changes in their net positions.
It is important to emphasizes that a bank’s decision to hold sovereign
debt is not an expression of an investment preference.
Rather, it is a decision related to
liquidity management. As such banks seek ‘risk free’ assets that can be
used to access liquidity at any time, particularly at the time of
crisis. Regulators continue to treat sovereign debt as highest-quality
and risk free (0% risk-weight) collateral.
With no RWA constraint and full refinancing
eligibility, banks are encouraged to hold sovereign debt; its
(selective) transition from a ‘risk free’ to a ‘risk’ asset is therefore
unexpected and highly damaging.
Earlier we said all but two entities have been
dumping PIIGS (or GIIPS as Goldman prefers to call them).
Sure enough, one of the unlucky two tasked with
buying everything sold in the secondary market is of course the ECB: the
same bank that everyone is accusing of not doing more to help.
Funding - Increasingly reliant on the ECB
The use of ECB facilities rose again
in October, driven by Spanish (€7 bn) and Italian (€6 bn) banks.
For 4Q, we expect a sharp increase in use by
Italian banks, driven by:
LCH’s increased margin requirements on
Italian REPOs, which now make market REPOs comparatively more expensive
than those at the ECB;
a steady fading of the ECB funding
It is possible that the majority of the €300
bn of interbank funding and market REPOs could end up on ECB’s balance
That alone would have the capacity to lift current ECB use from
€579 bn to just below €900 bn. This level of use would compare with
previous crisis peak levels (2009) of €870-897 bn.
We have long argued that the ECB has capacity to back-stop bank funding
requirements - and there is no change to this view. That said, a gradual
closing of the last functioning wholesale funding market - short-term
REPOs, backed by government bonds - is certainly not an encouraging
The re-opening of the long-term funding
markets has been pushed further out, in our view.
LCH triggers increased margin requirements
on Italian REPOs
On November 9, 2011, LCH.
Clearnet (LCH) announced its decision to
increase ‘deposit factors’ applied to Italian debt repo transactions
(e.g. haircut on collateral) by 3.5% to 5% depending on the duration of
The move was not a surprise as LCH’s Risk
Management Framework states that it,
“would generally consider a spread of
450bp over the 10-year AAA benchmark to be indicative of additional
sovereign risk”, which may cause it to “materially increase the
margin required for positions in that issuer”.
Previously, ECB interventions kept the
spreads below the key trigger level of 450bp.
Italian banks likely to switch to the ECB
Owing to increased margin
requirement, market REPOs have become more expensive. In our view, the
banks are therefore likely to look for alternative sources of funding,
especially with the ECB.
Typically, the cost a bank faces to fund a sovereign bond portfolio
through a tri-party repo transaction consists of:
the funding rate (‘repo rate’) for
the duration of the repo and applied to the market value of the
additional funding costs, mostly in
the form of the haircut/margin required by the Central Clearing
House as collateral
The higher the haircut/margin level and the
marginal funding cost, the higher the cost of the borrowing, which
becomes ineffective when it exceeds the cost of the ECB repo facility
(1.5% repo rate + haircut funding cost).
The Italian banks’ funding currently includes €155 bn of customer repos
and €193 bn of interbank funding exposure to non resident MFIs. The
large portion of the latter takes the form of secured funding (repos).
In addition, the Italian banks currently draw on €111 bn of ECB funding.
It is possible that the majority of the €300 bn of interbank funding and
market REPOs could end up on the ECB’s balance sheet. That alone would
have the capacity to lift current ECB use from €579 bn to just below
This level of use would compare with
previous crisis peak levels (2009) of €870-897 bn.
So just why again is it that anyone accuses the
ECB of doing nothing?
When all is said and done under the current
regime, the ECB balance sheet will be just under €2 trillion, and that is
without any incremental printing, courtesy of the farce that is
"sterilization" with banks which exist only due to the ECB, thereby making
said sterilization about the most idiotic thing ever conceived.
Yet that is
what spin is for...
In the meantime, the European shadow banking system is on the verge of a
complete shutdown, with repos of all shapes and sizes about go dark.
And summarizing all of the above visually, here come the charts:
And while we already discussed that one half of
Europe's dumb money is the ECB by necessity, to get the answer for who is
the other half we go back to our post from last Friday:
Completing the picture is the answer of who
the dumb money is:
Italian bonds still have one support
Domestic banks appear to be holding on
to their much larger holdings. As of last December, EBA stress tests
showed Intesa Sanpaolo held €60bn of Italian debt. UniCredit and
Banca Monte dei Paschi di Siena held €49bn and €32bn respectively.
Recent results indicate that those
holdings have changed little.
“We will keep investing the largest
part of our liquidity in Italian government bonds,” said Corrado
Passera, chief executive officer at Intesa Sanpaolo, in a call
with analysts this week.
“We believe they provide the right
yields vis-à-vis the cost. So no policy change on our side.”
Still, according to the investment
banker advising firms on their Italian holdings, the domestic banks’
decisions to hold on could have more to do with their inability to
offload such large amounts quickly and without deep losses. Indeed,
some Italian bankers seem resigned to the situation.
Capital concerns are also preventing them from selling.
“The key issue is on solvency and I
think they made a mistake in requiring us to hold more capital,”
said the chief executive of a mid-sized Italian bank.
“To meet these levels we cannot sell
too much of our sovereign debt.”
So instead of selling, Italian banks are
doing all they can to dodecatuple down and... buy!?
Everyone is dumping European paper, except for
the ECB and Italian banks, which have no choice and instead have to double
down and buy more.
In the meantime, the market is going
increasingly bidless as liquidity evaporates, confidence has disappeared and
virtually everyone now expects a repeat of Lehman brothers. Of course, this
means that when the bottom finally out from the market, the implosion of the
Italian banking system, and thus economy, will be instantaneous.
And when Italy goes, so goes its $2 trillion+ in
sovereign debt, and at that point we will see just how effectively hedged
and offloaded the rest of the world is, as contagion shifts from Italy and
slowly but surely engulfs the entire world.
Incidentally, is it really that surprising that Goldman is now doing its
best to precipitate a bank run of Europe's major financial institutions by
"suddenly" exposing the truth that was there all along? During the great
financial crisis of 2008, the one biggest winner from the collapse of Bear
and Lehman was none other than the squid.
This time around, Goldman has set its sights on
Europe and has already made sure that its tentacles will be in firmly in
control at all the right places when the collapse comes, as
the Independent shows.
And when banks are falling over like houses of
cards in the middle of a tornado cluster, and the financial power vacuum is
in desperate need to be filled, who will step in once again but... Goldman
'Goldman Sachs Dictatorship - Hitler's Dream'
December 7, 2011
Time is running out for Eurozone leaders to save the single currency, as
they prepare for eleventh-hour talks in Brussels. Germany and France are
pushing to change EU treaties, to create a fiscal union and introduce
tougher budget rules.
However, the European Council President believes they
can achieve the same goals without altering existing treaties, which would
need a lengthy ratification process.
The British Prime Minister warned he
wouldn't agree to anything which damaged the UK's role in the European
market. Meanwhile, credit ratings giant Standard and Poor's has added to the
sense of urgency, as it threatens to downgrade 15 Eurozone countries as well
as their bailout fund.
Investigative journalist Tony Gosling says countries
need to return to their own currencies if they're to escape being ruled by