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Banks Bought Bonds Amid Debt Crisis

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Even as Europe’s sovereign debt crisis intensified early this year, banks continued to load up on debt from Greece and other countries with the most acute fiscal problems, according to a report released Sunday that also suggested that the European Central Bank inadvertently encouraged institutions to increase their risk.

Banks increased the amount of credit they extended to government and the private sector in Greece, Ireland, Portugal and Spain by 4.3 percent, or $109 billion, in the first quarter of 2010 compared with the previous quarter, the Bank for International Settlements said. The additional credit brought banks’ total exposure to the four countries to $2.6 trillion. The B.I.S., located in Basel, Switzerland, serves as a clearinghouse for the world’s central banks.

European banks increased their holdings to the four countries more than banks from the United States or other places outside of Europe, possibly because banks in the euro zone could use debt from Greece and the other countries as collateral for low-interest loans from the European Central Bank, the B.I.S. said in its quarterly report.

The E.C.B. has been lending euro-zone banks as much as they want at 1 percent interest, provided the banks can put up collateral like government bonds. The massive liquidity has helped weaker banks survive periods when they were unable to borrow from other banks or outside investors.

The fact that higher-risk European debt was less liquid, or harder to sell quickly, “was less of a concern for euro-area banks than for other banks since the former could ‘liquefy’ this debt in their operations with the E.C.B.,” the B.I.S. said.

The data suggest that the E.C.B. was effectively encouraging euro-zone banks to buy debt from Greece and the other troubled countries. The policy supported Greece and Spain as they sold new bonds but also meant that euro-zone banks were taking on more risk at a time when the E.C.B. had been trying to stabilize the European financial system.

The E.C.B. has been trying to dial down its support for euro-zone banks, but last week extended the policy of unlimited lending to banks at least through mid-January, amid signs that some institutions are still unable to raise all the money they need through normal interbank or market channels.

The E.C.B. has tightened its criteria for the collateral it accepts since the period covered by the B.I.S. statistics. The bank now imposes so-called haircuts of as much as 29 percent on government debt used as collateral, meaning that banks cannot borrow at the full face value of the bonds. That policy could reduce the incentive for banks to buy the riskier debt.

German and French banks continued to be the most heavily exposed to debt from the countries on the periphery of the euro zone. French exposure to Greece alone was $111.6 billion, though only $27 billion of that was government debt. The rest was credit to Greek businesses and individuals, derivatives contracts or other categories. German banks’ exposure to Greece totaled $51 billion, of which $23.1 billion was government debt.

More at the link.


Seriously you just couldn't make this up.

So European banks have just screwed themselves even more because no one thought this through or they did and somehow thought this was a good idea.

Total genius.

Still I'm sure it's contained!

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Seriously you just couldn't make this up.

So European banks have just screwed themselves even more because no one thought this through or they did and somehow thought this was a good idea.

Total genius.

Still I'm sure it's contained!

you keep making the mistake that soverign debt is like all other debt. It isn't.

Sovereign debt is not debt, it's money.

when sovereigns en masse can't keep up the charade that their issuance is money, not debt, they stop paying out on that pseudo debt and yields fall (not rise), which makes that debt (10 yr notes paying circa 2%) look more and more like the money it actually is with every passing day.

the story of mass global sov debt default is the story of QE, zirp, etc, not soaring IRs. the story of the end of the monetary economy and the start of the next economy, whatever it is.

whether it is contained or not depends entirely on whether joe blow or james spiv can get a materially better zero-risk yield elsewhere or not. If he can't then its contained, if he has many better options then it is not contained, at least as far as blighty is concerned.

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soooo... buy €100m of Greek bonds at a discount, say 80c in the €.

Use them as collateral for €100m loans from the ECB.

Your now up by €20m because you bought at a discount.



Basically the banks are speculating in Greek bonds using ECB money.

If Greece defaults, I assume they just tell the EBC to keep the bonds?

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