heads up
just in
From: M
Sent: Wednesday, December 21, 2011 12:51 PM
Subject: Re: Comments - Week of Dec. 19
I hear you H - but my question is whether or not repo'd assets to the ECB reduce their Risk Weighted Assets on their balance sheet. I'm guessing that it does not? And if so, they need to shed 10 to 20 percent of their assets by refusing to roll their existing loans to meet Basel requirements. Since Sovereign Debt has a zero-risk weighting according to Basel, they can add tons more Govt. Debt to their balance sheet without violating Basel requirements - leverage that Govt. debt 6 or 8 or 10 times, and you end up with a massive ROE..... no?
M
From: H
Sent: Wednesday, December 21, 2011 12:08 PM
Subject: Re: Comments - Week of Dec. 19
yes, and no.
yes, that's what we're seeing, and no, it doesn't mean a credit crunch for companies.
Study the ECB decision closely. It is a wicked, potentially highly inflationary move. The national central banks of the euro system will in fact take corporate credit claims on the banks books as collateral - this measure is specificaly designed to keep credit to corporations available in spite of the funding crunch. The amount of eligible collateral could be close to € 2 to € 3 trillion from this source alone, maybe even more, depending on how generous the assessment of credit quality is.
Of course in the final analysis, they are trying to cure a solvency problem with the help of inflation - an extremely dangerous game, with predictable long term negative consequences. It is the equivalent of digging an even bigger hole in the misguided belief that buying time in this manner is going to lead to a good outcome. As I've been saying all along: the ECB will never be able to take back its 'temporary' liquidity provisions. As soon as it tried to run them down in the course of 2010/11, the crisis returned in full force.
This is the nature of the current system: it either continues to expand money claims or it implodes. Of course it can not continue forever - and all interventions in history have eventually failed to stop the corrective forces of the market from claiming the scalps that were their due.
Short term gain will bring long term pain.
On Wed, Dec 21, 2011 at 4:55 AM, M wrote:
I note that 2-Year Italian paper is now trading at 5%.
If I was an Italian bank, I think I'd be borrowing from the ECB at 1%, buying 2-Year Italian paper and basically refusing to roll loans on any that come due. I'm making a fortune on the steepness of Governments while massively improving my Basel ratios as I switch from company loans to "risk-free Government paper."
Apply this strategy to Greece, Portugal, Spain, etc.
Is that what we are seeing? And if so, does that portend an even greater credit crunch for companies going forward?
M
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