The finance blog Zero Hedge has three stories out this morning that cover the state of Europe's finances. The picture they paint isn't a pretty one.
The first story has to deal with the European Central Bank (ECB) and its long-term refinancing operations (LTRO).
As some may already know, the ECB started making margin calls on its credit-extensions to counter parties last week, Zero Hedge notes. The idea being that the margin accounts will be brought to minimum maintenance levels. And in Greece's situation, the idea is that the small county would stick its collateral with the ECB in return for freshly printed money.
Writers at Zero Hedge don’t think it'll go that smoothly.
“[The] 'Deposits Related to Margin Calls' line item on the ECB's balance sheet will likely now become the most-watched 'indicator' of stress as we note the dramatic acceleration from an average well under €200 million to well over €17 billion since the LTRO began,” Zero Hedge writes.
But what’s going on here? What, exactly, is the problem?
“The rapid deterioration in collateral asset quality is extremely worrisome…as it forces the banks who took the collateralized loans to come up with more 'precious' cash or assets…or pay-down the loan in part,” Zero Hedge explains, “This could very quickly become a self-fulfilling vicious circle - especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.”
What’s the takeaway? That is, what are the overall implications?
Source: Zero Hedge
“What should…worry the Germans is the fact a 37x levered…central bank with €3 trillion balance sheet that has extended credit in a 'risk-managed' approach on what appears to be an ever dwindling supply of performing collateral is starting to see dramatic 'gaps' in its asset-liability exposure,” Zero Hedge writes.
Simply put, the ECB is extending credit for “risk management” but there doesn’t seem to be any collateral left. Obviously, as mentioned in the above, this will increase the gap between assets (what they have) and liabilities (what they owe).
The next report Zero Hedge present is this:
... Europe is now bracing for a Greek default as the Milan Bourse earlier announced it has suspended Greek bonds from trading indefinitely - perhaps related to this is the fact that after trading in the triple digits yesterday, the Greek 1 Year just slid to an all time record 1114 percent - looks like there is not much value in that post-reorg Greek package offered to PSI volunteers.
A quick note: “PSI” refers to Greece's “Public Sector Initiative,” a debt swap plan that involves using Greek bonds (i.e sovereign debt tied up in pension funds) to pay off debts. Which is to say, considering where the Greek 1 Year is trading, the Greek “post-reorg” really isn’t offering anything to this plan.
“Finally, the deposit money held at the ECB barely budges, as it prints at €817 billion down just modestly from yesterday's record print as Europe's banks brace for Thursday's PSI announcement with a big cash buffer,” Zero Hedge notes.
And the last story is brought via Reuters [emphasis added]:
Most Greek pension funds holding Greek sovereign debt have agreed to take part in a bond exchange to ease the country's debt burden but four have refused to do so, a Greek official said on Tuesday.
The pension funds have come under pressure from workers' unions worried the writedown on Greek debt holdings will affect the viability of their funds.
About eight or nine funds have agreed to take part but pension funds for journalists, police, the self-employed and hotel workers - which hold Greek debt worth 2 billion euros - have refused, the official said.
Wait. Greek police are simply refusing to go ahead with the “voluntary” exchange offer?
In the word of Zero Hedge: “Hmmm.”
What is know is that the number of pensions that don't want to play ball is 5. What is not know is "how many bonds any of the above non-dissenting funds own,” Zero Hedge notes.
“So how long until we get a headline that due to ‘unexpected complexities’ the PSI deadline has been extended by another X hours?”
Considering that a majority of Greece's debt is tied up in pension funds, and that it's highly unlikely pension recipients will part with their funds quietly (i.e. willingly), the Hedge's prediction that more of these stories are coming our way probably isn't that far off.