EUROZONE DEBT: TWO MORE UXBs YOU WON’T FIND IN THE UK & US MSM.
Greece has no money to pay international law creditors, and the Bundesbank is owed 550 billion euros by debtor banks
From Germany’s Deutsche Mittelstands Nachrichten this morning came the news that investors with Greek government bonds issued under international law continue their refusal to take a cut in debt.
The Slog has already posted about the Venizelos Mob raiding University and Hospital bank accounts to pay off the English Law creditors with contracts that were watertight on the ‘money now please’ thing. Generalised international law is different, but only slightly so: Greece wants them to sacrifice most of their demands, but the remaining investors are rejecting any form debt restructuring.
This impasse was announced by the Greek debt agency yesterday (a Sunday – fancy that) and it seems the amount at stake totals three billion euros. In the past week, the Greek government has tried to agree a rescheduling of the first 539mn euros, but the negotiations failed, following which Athens made it clear that it had no further funds available with which to repay the debt.
This isn’t default, it’s insolvency. In the commercial sphere, Greece would now be subject to a simple winding up order and refused the right to trade further. But even in the rarified alternative universe of sovereign debt, payment default on the bonds under international law will trigger the usual massively leveraged obligations and derivatives.(Needless to say, it’s the Hedgies that are remaining immovable – as I predicted some weeks ago).
But Germany itself is also in a difficult place on the banking front. I’ve post extensively (and intensively) on the subject of Target 2 at the ECB being used to dump debt onto creditor banks, and the Central Bank, in the eurozone. Now we have some clear accountancy via a website of which I’ve been hitherto unaware, but to which I shall be returning – called Sober Look. Apt name to have in the current climate.
Sober Look confirms that the German Bundesbank is replete with unwanted assets – bank accounting being such as to pretend that radioactive isotopes are things that your kids could happily play with. As a result of Draghi’s LTRO scam, the junk resting within the remit of Jens Weidmann was a cool 50 billion euros higher in February 2012 versus January. At the start of 2009, 50 billion euros was the total owed to the Bundesbank by other eurobanks.
No wonder Jens decided last week that enough was enough. No wonder Jean-Claude Trichet is very happy to be retired and forgotten.
Very big thank you to Sloggers Stevie and Viking Jack for alerting The Slog to this.
Bundesbank tries to cap periphery exposure as TARGET2 claims spike
As predicted a month ago, the Bundesbank balance sheet grew materially due to increases in TARGET2 claims against other central banks. Again, these imbalances are driven by LTRO financing provided to periphery banks. In an LTRO transaction the periphery National Central Banks (NCBs) credit the accounts of their nation's banks (who seek LTRO financing) and debit the Eurosystem account. The periphery banks then pay down secured loans from German banks (replacing them with LTRO), increasing Bundesbank's TARGET2 claims (as euros move from periphery to Germany). In effect Bundesbank partially finances the periphery NCBs via the ECB. Below is the latest snapshot of Bundesbank's balance sheet.
Explanations: * The balance sheet items for gold, foreign currency, securities, and financial instruments are revalued at market rates at the end of each quarter. The figures for the latest date are always to be regarded as provisional. Subsequent revisions, which appear in the following publication, are therefore not specially marked. Discrepancies in the totals are due to rounding. — 1 For the detailed composition of the Bundesbank’s currency reserves, see table "Official reserve assets and other foreign currency assets" (Statistics/Regularly up-dated economic data/Data Template on International Reserve/Foreign Currency Liquidity), which is updated on a weekly basis. — 2 Deutsche Bundesbank’s claims on and liabilities to non-Eurosystem central banks are not included, see also footnote 4. — 3 Excluding Deutsche Bundesbank’s claims on and liabilities to central banks of the Eurosystem, see also footnote 4. — 4 Deutsche Bundesbank’s claims on and liabilities to central banks of the European Union (i.e. central banks of the Eurosystem and non-Eurosystem central banks) are recorded on a net basis; the net position of the Deutsche Bundesbank vis-à-vis central banks of the European Union is included within the item "Other assets" ("Other liabilities") if it has a positive (negative) sign. — 5 According to the accounting regime chosen by the Eurosystem on the issue of euro banknotes, a share of 8% of the total value of the euro banknotes in circulation is allocated to the ECB on a monthly basis. The counterpart of this adjustment is disclosed as an "Intra-Eurosystem liability related to banknote issue". The remaining 92% of the value of the euro banknotes in circulation are allocated to the NCBs on a monthly basis too, whereby each NCB shows in its balance sheet a share of the euro banknotes issued corresponding to its paid-up share in the ECB’s capital. The difference between the value of the euro banknotes allocated to the NCB according to the aforementioned accounting regime, and the value of euro banknotes put into circulation, is also disclosed as an "Intra-Eurosystem claim/ liability related to banknote issue".
Note that in order to obtain the exact TARGET2 position of the Bundesbank, one needs to net the "other assets" with "other liabilities". There is also a relatively small amount of claims against EU central banks that are not part of the Eurosystem that should be taken out. For the purposes of tracking the general trend however, that component can be ignored.
Deutsche Bundesbank claims on NCBs
This would not be an issue if the Eurosystem is to stay intact. However should a nation exit the euro, its central bank may not have the ability to cover its TARGET2 liabilities. In that case the ECB and the member states would be responsible for parsing out the losses among the remaining states based on their share.Clearly Bundesbank has become concerned about its exposure to periphery nations. The central bank reacted to this increase by limiting the types of collateral it accepts. In particular it will no longer accept bonds guaranteed by certain Eurozone states (several states bailed out their banks by guaranteeing bonds issued by these banks, allowing them to post such bonds as collateral for LTRO financing - see this post for more detail)
Bloomberg (ht Kostas Kalevras): The Bundesbank won’t lend to banks against bank debt guaranteed by Greece, Ireland and Portugal from May, the newspaper said, citing unidentified officials. The Frankfurt- based central bank currently has less than 500 million euros ($667 million) of those bonds on its balance sheet, FAZ reported.
These specific bonds constitute a relatively minor exposure for the central bank, but because of the massive claims against the NCBs, it is trying to cap the overall exposure. This highlights Bundesbank's concern about the stability of the Eurosystem in its current form. It is possible this concern will soon spread to other core central banks, creating further rifts within the Eurosystem.