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So the key to the whole thing is probably the existence of large "hold to maturity" positions in German banking books, with maturity dates before 2013.

Banking regulators worthy of the name would require that banks set aside reserves to cover likely losses on "investment" books, of which the deterioration of the mark-to-market would be a basic indicator.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Apr 15th, 2011 at 06:34:46 AM EST
[ Parent ]
And competent regulators would have forced progressively larger haircuts on the private banking sector as collective exposure to foreign markets grew. But that would have required the BuBa to pay attention and police creditors instead of waxing lyrical on the moral responsibilities of debtors to fulfil mathematically impossible obligations.

The more I think about it, the more a central bank guarantee of a lower bound on the exchange rate strikes me as turning idiosyncratic risk into systemic risk. Or, if you will, socialising the cost of buying currency swaps to hedge against sudden currency movements by replacing it with restrictions on fiscal and interest rate policy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 06:54:25 AM EST
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