The Banking and Strategy Initiative

Chillin' out till it needs to be funded

European Sovereign Debt Crisis: How $12 bln could wipe out the European Central Bank?

The media noise is deafening. Analysts at UBS and Citi taking advantage of the chaos have seemed to make current blog analysis repiorts freely available. (Nope, the latest UBS and Citi researhch posts are quite good, grreat work guys!)

A comical moment in this veritable bed of chaos, with ECB emerging from a string of auctions following a string of downgrades following a string of collateral rules came to a state of rest yesterday with the Euro decoupling stopped short by the bull market, disregarding Citi’s latest 5000 job cuts for a rise in the Euro, Financials losing their initial lead even before the Emperor comes out to commingle and America’s heritage puts up its case for a honey and muesli coated 2012.

Telegraph reported the morning of collateral from the Citi report with a faux pas adding EUR 12 bln to the mix from bank loan books. Seemingly in all the chaos allowing building of ABS books with no value as collateral at origial prices, and banks issuing securitised tranches for themselves to buy so it could be posted as collateral, banks never considered securitising their own loan books when they needed the money. Shows you how much risk management is understood witin the banks.

Coming back to the man at the Telegraph, he probably did not realise that the collateral game is alreaady in Trillions and if bank loans were only $12 bln, Unicredito would not be able to fill its EUR 6 bln hole at a A+ rated haircut

Bank loans as Collateral

The European banks have loans worth EUR 12 Tln and these would be supplying to ECB in bags to borrow against collateral facilities. I hope the second tranche of the LTRO remains collateral free when it opens again in February. First assignments of collateral were gone by the time 2011 began, so what’s going around does not a downgrade make, it nullifies all rating enhancements/ deratings for risk management as the only recourse on already pledged collateral would e a quick for pennies out of court settlement if a devolvement does occur.

ECB can go bust?

No, not really. Central banks cannot go bust. in the ECB’s case the 17 Euro system of Central banks partners will alll have to decide to print new money together..



This entry was posted on January 17, 2012 by in Amitonomics, Banking, European Sovereign Debt crisis.


%d bloggers like this: