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Congratulations To The European Taxpayer You Now Own €16.5Bn Of Crap

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Foreign holders of Greek and Portuguese debt have seized on emergency intervention by the European Central Bank to exit their positions, leaving eurozone taxpayers exposed to the credit risk.

The Bank of New Mellon said its custodial data showed a "sharp acceleration" of net sales of debt from the two countries after the ECB began purchasing €16.5bn of bonds from southern Europe and Ireland in bid to halt market panic. "It rather suggests that investors leapt at the opportunity to clear their balance sheets of intolerable risk," said Neil Mellor, the bank’s currency strategist. "This leaves the ECB itself in an unpleasant situation since it now faces a deterioration in its own balance sheet."

While ECB action has greatly reduced bond spreads on peripheral eurozone debt, it has not yet stabilized the broader markets. The euro fell to a four-year low of $1.2260 against the dollar in early trading. Jean-Claude Juncker, the head of the Eurogroup, said on Monday that this risks becoming disorderly. "I'm not worried as far as the current exchange rate is concerned: I'm worried as far as the rapidity of the fall is concerned."

Crucially, there are still serious strains in the interbank lending market. Hans Redeker, currency chief at BNP Paribas, said the LIBOR-OIS spread in Europe used to gauge credit stress is flashing danger signals, hovering near levels seen during the Lehman crisis.

The ECB’s strategy of draining liquidity to offset the stimulus from the bond purchases risks making matters worse. "They are using one-week deposits for sterilisation and the effects of this to make short-term funding more expensive. This will force banks to sell assets to shrink their balance sheet and risks causing a credit crunch," he said.

Mr Redeker said the ECB is pursuing a contractionary policy to assuage concerns in Germany that Club Med bond purchases will stoke inflation. "They have read the German press and it made their hair stand up on their necks. The reality is that a deflationary cycle is developing in Euroland and the ECB will eventually have to start quantitative easing," he said.

Dominic Wison, market chief at Goldman Sachs, said talk of an EMU break-up were overblown but echoed concerned about strains in the short-term money markets. "The LIBOR-OIS spreads widened consistently through the week. Ongoing pressures on funding have not yet been quieted. As we saw in 2008 and 2009, those stresses – if they do not subside – are generally toxic for markets," he wrote in a client note.

A report by RCB Capital Markets said German banks have yet to come clean on 75pc of their combined exposure to €45bn of Greek debt. The state-owned Hypo Re has revealed holdings of €7.8bn, equal to 243pc of its tangible equity. Commerzbanks’s subsidiary Eurohypo holds €3bn, or 77pc, of its tangible equity.

RBS said that some German banks may face risks if there is a voluntary debt restructuring by Greece, since this would not trigger debt insurance contracts on credit default swaps. This would leave them facing much larger debt write-downs than they bargained for.

Analysts say austerity measures across southern Europe are causing the euro to weaken further because they will dampen growth and may lead to protracted slumps, forcing the ECB to delay rate rises.

Italy is next in line for a fiscal squeeze, preparing €25bn of belt-tightening over the next two years. Leaks in the Italian media say Rome plans to freeze public sector wages, limit recruitment, and delay retirement.

I don't think they are toxic of for the markets, toxic for the taxpayer but not the markets as losses quite rightly are socialised.

The fiscal squeeze is going to be global, debt deflation looming???

Edited by interestrateripoff
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I don't think they are toxic of for the markets, toxic for the taxpayer but not the markets as losses quite rightly socialised.

The fiscal squeeze is going to be global, debt deflation looming???

quite rightly socialised?


The ECB offered to buy Greek bonds at 100% value and amazingly everyone dived in.

I imagine some speculators who bought bonds below 100% of value must be well pleased now having made a packet. And some shorters are now f*cked.

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