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We know the cumulative amount of debt held by the ECB through its "Securities Market Programme". There's even a Bloomberg index for it.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 12:00:05 PM EST
[ Parent ]
ECB: Liquidity analysis
Outstanding amount * € mil. Date
74,912
10 Jun. 2011
* Settled amount as of given date

The outstanding amount at end 2010 was 4.8 billion (quoted here)

So the ECB has been very, very busy buying up distressed bonds at hefty discounts. Is the ECB the main creditor of the Greek government?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Jun 15th, 2011 at 12:40:46 PM EST
[ Parent ]
Well, that greatly simplifies matters.

The private sector has now had its haircut. The ECB can commence with the rolling over at par.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 15th, 2011 at 12:47:06 PM EST
[ Parent ]
Trouble is, to "roll over" you have to buy new issues and the ECB cannot buy from Greece at issue.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 01:02:19 PM EST
[ Parent ]
That's true, but not something that cannot be solved by laundering the issue through the Hellenic Postal Bank.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 15th, 2011 at 01:34:49 PM EST
[ Parent ]
Can they purchase on the secondary market?


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Jun 15th, 2011 at 02:02:13 PM EST
[ Parent ]
Yes, but they don't want to.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 02:03:59 PM EST
[ Parent ]
Fortunately, that problem can be solved by the judicious application of political pressure.

Time to dust off the embarrassing photos of Trichet, or the stress tests of German banks...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 15th, 2011 at 02:22:29 PM EST
[ Parent ]
IOW, everything that doesn't promote Pillage is forbidden.

Greek 10 year bonds are now trading at 17.73% interest rate.  Two year notes are at 28.15%.  Somebodies are going to make a whacking pile of money using this in the Dollar/Euro Carry Trade.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Jun 15th, 2011 at 02:26:21 PM EST
[ Parent ]
CDS spreads are at 16% but nobody wants the CDS insurance payouts to be triggered.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 03:06:40 PM EST
[ Parent ]
I could get somewhat miffed, at this point, at the "Let's Play Central Banker" game going on but there's nothing I can do about so there's no point.

Instead ...

LOOK!

It's a Bright Shiny Object!

(cool)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Jun 15th, 2011 at 03:47:35 PM EST
[ Parent ]
Just because you have a CDS swap supposedly covering your investment doesn't mean that your counter-party will be able to pay if it is triggered. After all, the whole point of CDS swaps was to enable you to treat risky junk as though they were AAA investments and relieve you of the obnoxious reserve requirements. No one ever thought they would have to pay up and many probably won't. So everyone is afraid to find out.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jun 15th, 2011 at 04:48:17 PM EST
[ Parent ]
Just because you have a CDS swap supposedly covering your investment doesn't mean that your counter-party will be able to pay if it is triggered.

Granted, but if you buy CDS protection it's because you expect to be paid in case it is triggered, right?

Right?

Um...

the whole point of CDS swaps was to enable you to treat risky junk as though they were AAA investments and relieve you of the obnoxious reserve requirements

Okay, let's parse this.

The following table applies for its risk-weighting:

Claims on sovereigns and their central banks will be risk weighted as follows:
Credit AssessmentAAA to AA-A+ to A-BBB+ to BBB-BB+ to B-Below B-Unrated
Risk Weight0%20%50%100%150%100%
A triple-A bank has a risk weighting of 20%.

Capital is 8% of risk-weighted assets.

So... take a Greek bond.

Before the crisis started, Greece was in the category where its bonds had a risk weighting of zero. So, holding a Greek bond costed no capital.

Now, Greece is rated below B, so its risk weighting is 150%, so the capital charge is 8% times 150% or 12% of notional.

You can buy a CDS at a 16% annual premium. The capital charge for the AAA CDS is 8% times 20% or 2%.

So, does it pay to free up 10% of notional from the capital charge, at the expense of 16% annually in CDS premia? I don't think so.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 05:07:21 PM EST
[ Parent ]
The example I had in mind was Goldman and AIG. AIG had lost effective internal controls when the former CEO departed and insured below reasonable cost. I do not know if buying a CDO makes sense to free up capital if the CDO is properly priced. I will bet that lots of CDO issuers on Greek debt would be happy to give back  premium they have received and then some to be off the hook on those CDOs. And even good rocket scientists make rockets that explode.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 16th, 2011 at 12:41:13 AM EST
[ Parent ]
Not CDO (Collaterallised Debt Obligation - a kind of Asset-Backed-Security) but CDS  (Credit Default Swap).

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 01:56:27 AM EST
[ Parent ]
Yes, I realized that, but yesterday was a day from Hell! I will make a post in the OT.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jun 17th, 2011 at 02:24:46 PM EST
[ Parent ]
The voluntary part of it, anyway...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 01:11:03 PM EST
[ Parent ]
The Security Market Programme refers to all bond purchases, not just of Greek bonds.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 12:53:52 PM EST
[ Parent ]
The outstanding amount at end 2010 was 4.8 billion (quoted here)

What?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 12:56:31 PM EST
[ Parent ]
The 4.8bn refers to the Covereb Bond Programme, which was a bailout of the German Pfandbriefe market and took place in 2009. The amount was

Covered Bond Purchase Programme
Outstanding amount *
€ mil.     60,268
Date     14 Jun. 2011
* Settled amount as of given date
What is the figure of 4.8bn you homed in on?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Jun 15th, 2011 at 12:59:09 PM EST
[ Parent ]
Sorry, I misquoted.

I linked the following FT blog by Emma Saunders, from 11 March. I picked up the covered bond purchase number (4.8 billion) instead of the securities markets programme number (13.1 billion), being the holdings of the ECB at end of 2010.

Eurosystem bond profit - correction | Money Supply | News, data and opinions on market-moving economics from the Financial Times - FT.com

To set the record straight, ECB national accounts show that the central bank held more like 18 per cent than 8 per cent of bonds bought to aid sovereigns in distress.
17.8 per cent of them as at end 2010, to be precise. At the end of December, the total stock of bonds purchased was €73.5bn, and 13.1/73.5 is 17.8 per cent.

(Sorry for the 10 billion euro difference.)

The takeaway point is that, in the 5-and-a-bit months to June 11, the ECB has increased its holdings in the securities markets programme phenomenally :

13 to 75 billion on the SMP (62 billion net purchases)

I've no idea what proportion of the stock of distressed sovereign bonds that represents... any ballpark numbers around?

So :

  1. the ECB claims to be buying up these junk bonds because the market is dysfunctional, i.e. is improperly pricing in the risk of defaults which ALL serious people know to be impossible (which is why they are booked without impairment, as "hold to maturity" zero-risk securities!)
  2. therefore the price of these bonds would be MUCH lower, and the yields higher, if the ECB did not intervene,
  3. I want to understand whether the ECB is buying these bonds directly from the banks, or whether speculators bought the bonds from the banks, then took fright and sold on to the ECB (in the aggregate) : i.e. are the speculators getting a haircut too?
  4. How does default insurance correlate to bond ownership? Is it necessary to own bonds in order to purchase insurance? Are the speculators buying insurance when they buy bonds?
  5. If the bulk of Greek debt is now no longer held by banks, but by speculators who hold insurance, then when the price drops, their interest is best served  by default, right? Or by full payment at term without rollover, but unserious people like these speculators know that this is impossible.

I've probably got hold of the wrong end of a stick that may not even exist; but I'm trying to follow the money here. And you people are writing my book for me.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Thu Jun 16th, 2011 at 04:23:38 AM EST
[ Parent ]
The 13 billion figure is inaccurate or does not mean what you say it means.

Businessweek: ECB Fails to Sterilize Bond Purchases With Deposits (December 29, 2010)

The European Central Bank failed to fully neutralize the extra liquidity created by its bond purchases for a second time since the program began in May.

The Frankfurt-based ECB said today it drained 60.78 billion euros ($80.66 billion) from money markets via seven-day term deposits, almost 13 billion euros less than the 73.5 billion euros it intended to absorb.

...

The central bank started buying government bonds on May 10 in an effort to restore confidence in markets rattled by the sovereign debt crisis. To ensure the purchases don't swell the money supply and create inflation risks, the ECB each week drains the amount of extra liquidity it has created by offering banks seven-day term deposits.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 04:31:03 AM EST
[ Parent ]
Already in June 2010: ECB fixed-term deposit FAIL (FT Alphaville, June 29 2010)
The ECB failed to auction the €55bn in fixed term deposits it had planned to, and what it did auction (€31.86bn) was at a much-higher rate (0.54 per cent) than what it offered at the start of its Securities Markets Programme (SMP). The market seems to be holding tight to liquidity.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 04:32:57 AM EST
[ Parent ]
Quoting from ECB's annual accounts (pdf, page 15):
The ECB's holdings of securities purchased under both programmes at the end of 2010 were
as follows:
 
                                  2010 €            2009 €               Change €
Covered bond purchase programme   4,823,413,246     2,181,842,083     2,641,571,163
Securities Markets Programme      13,102,563,262           0           13,102,563,262
Total                            17,925,976,508    2,181,842,083    15,744,134,425

...
and comparing with their current position

which is probably an apples-to-oranges comparison (holdings/outstanding amount?)

So I got the wrong end of the stick, there has not been a massive buy-up of bonds by the ECB in 2011. They have either decided that the markets are correctly pricing the bonds (in contradiction with their "mark-to-book" policy), or have renounced market intervention (recognition that they are powerless?)

In any case, if the ECB holds €50B of Greek bonds, they were mostly bought in 2010, and that comes out to more than a third of the total of SMP holdings (75B) and CBP (60B), no?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Jun 16th, 2011 at 04:59:28 AM EST
[ Parent ]
These must be direct purchases by the ECB directly.

The rest of the Securities Market Programme balance of 70 billion must be purchases by the National Central Banks.

The Eurosystem is a complicated monster.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 05:01:43 AM EST
[ Parent ]
Look at the Bloomberg graph
The ECB has not bought any significant amount of bonds this year.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 04:36:35 AM EST
[ Parent ]
I've no idea what proportion of the stock of distressed sovereign bonds that represents... any ballpark numbers around?

So :
the ECB claims to be buying up these junk bonds because the market is dysfunctional, i.e. is improperly pricing in the risk of defaults which ALL serious people know to be impossible (which is why they are booked without impairment, as "hold to maturity" zero-risk securities!)

If only. The ECB has given no sign that it believes in market failure, and it has not engaged in market-making of last resort. On why people book bonds without impairment, I can only say accounting conventions are bunk and one of the sources of the current crisis.
therefore the price of these bonds would be MUCH lower, and the yields higher, if the ECB did not intervene,
No, the ECB has made no effort to support prices.
I want to understand whether the ECB is buying these bonds directly from the banks, or whether speculators bought the bonds from the banks, then took fright and sold on to the ECB (in the aggregate) : i.e. are the speculators getting a haircut too?
These are open market operations. They buy them from anyone willing to sell to them. I suspect only banks holding the bonds in their marked-to-market "trading book" would have sold. But the "trading book" puts them in the "speculator" category.
How does default insurance correlate to bond ownership? Is it necessary to own bonds in order to purchase insurance? Are the speculators buying insurance when they buy bonds?
CDS is explained to the public as insurance but it isn't. In the US, famously, it was not regulated as insurance (which would have required people to own the bond in order to buy it - or at least it would have made payout of the CDS conditional on presenting the defaulted bond) in order to allow the market to be more liquid and the CDS volume to be unconstrained. Some people speculate purely on CDS (basically, on the CDS spread noise) without touching the bonds at all.
If the bulk of Greek debt is now no longer held by banks, but by speculators who hold insurance, then when the price drops, their interest is best served  by default, right? Or by full payment at term without rollover, but unserious people like these speculators know that this is impossible.
The bulk of Greek debt is, as ever, held by Greek banks for their position-making. Basically, banks can pad their balance sheets with government bonds in the absence of other assets. It is in this sense that JakeS says that sovereign bonds are not debt instruments but monetary policy instruments
I've probably got hold of the wrong end of a stick that may not even exist; but I'm trying to follow the money here. And you people are writing my book for me.
You're grasping at straws with your "follow the money".

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 04:46:44 AM EST
[ Parent ]
Migeru:
You're grasping at straws with your "follow the money".

Guilty as charged...

I'm still looking for a tangible villain. Given the mechanical inevitability of default for Greece (barring a deus-ex-machina from the ECB, which I think we can agree is not on the cards), the smart money is presumably gaming the ECB's stupidity for all it's worth.

The most obvious way of doing this is by buying CDS.

Therefore, anyone taking a major bet on Greek default, through a CDS position, may wish to influence outcomes by blocking off all alternatives to full payment (impossible) or default (jackpot).

Ratings agencies which declare "anything which is different from full payment (e.g. voluntary rollover) is equivalent to default" would seem to fit with such a strategy.

The head of a ratings agency who secretly held a massive CDS position might make a satisfying villain.

Just thinking out loud here.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Jun 16th, 2011 at 05:23:16 AM EST
[ Parent ]
Then you have to ask yourself who the sellers of the CDS are.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 05:25:25 AM EST
[ Parent ]
in a default scenario. If I have understood correctly, they are US banks, who must somehow trust implicitly that the ECB will not allow default. Or that the US government or Fed will not allow the ECB to allow default?

My head hurts.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Jun 16th, 2011 at 06:53:19 AM EST
[ Parent ]
They are not the suckers. They are collecting CDS premia (16% annual rate on Greek CDS right now) without being capitalised for paying out and everyone is doing their best that there isn't a default so they don't have to pay.

If you sell insurance with no intention of paying out, is that not fraudulent?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 07:09:54 AM EST
[ Parent ]
so if they have any overt or covert influence to exercise over events in my ficticious world, it will be working against the interests of my hypothetical speculator/credit rater. They would NOT want "voluntary" bond rollover to trigger a credit event.

This is all a matter of parasitical side-bets on the main events of Euro liquidity/solvency matters, but the stakes are high.

It could all get quite violent.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Jun 16th, 2011 at 09:08:56 AM EST
[ Parent ]
I keep forgetting you're not trying to figure out what's going on but you're actually actively looking for a pulp fiction villain so you can write a crime novel.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 09:21:39 AM EST
[ Parent ]
would be nice, but way beyond my intellectual capacity.

Writing a crime novel is easy, comparatively speaking. But I would prefer that it were plausible and didactic in nature.

It's a variation on the old "insure and burn" scam. No, it's actually more like match-fixing : placing bets on outcomes, and reducing the uncertainties.

I would prefer if I could identify actors who stand to gain from the Euro crisis itself, rather than CDS side-bets, and who might therefore wish to influence outcomes. But I haven't identified anyone yet : it looks like a lose-lose-lose situation, a seriously negative-sum game.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Jun 16th, 2011 at 11:59:24 AM EST
[ Parent ]
The you need to up your stakes and, instead of writing a pulp crime novel, writing a Twilight of Civilization epic tragedy.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 12:40:04 PM EST
[ Parent ]
Playing to my strengths.

Götterdammerüng, and lots of humping among the ruins.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Jun 16th, 2011 at 01:12:27 PM EST
[ Parent ]
Götterdämmerung :-)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Jun 16th, 2011 at 01:21:25 PM EST
[ Parent ]
I like the way Dammerüng sounds :D

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 03:42:35 PM EST
[ Parent ]
I would prefer if I could identify actors who stand to gain from the Euro crisis itself, rather than CDS side-bets, and who might therefore wish to influence outcomes. But I haven't identified anyone yet : it looks like a lose-lose-lose situation, a seriously negative-sum game.

In terms of money? Certainly.

In terms of goods and resources? Absolutely.

In terms of power? No. Power over others is a zero-sum game.

But of course this is a case where reality is unrealistic. It is hard to make a character in a book motivated by power over other people without having him become a caricature sociopath.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 16th, 2011 at 03:24:49 PM EST
[ Parent ]
Migeru:

If you sell insurance with no intention of paying out, is that not fraudulent?

That is the advantage for the buyer of having insurance regulated. But since this is not insurance, I guess pretending to insure would be the correct name of the service.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES!

by A swedish kind of death on Thu Jun 16th, 2011 at 11:24:23 AM EST
[ Parent ]
Well, the CDS buyers are also only pretending to buy insurance since
the whole point of CDS swaps was to enable you to treat risky junk as though they were AAA investments and relieve you of the obnoxious reserve requirements


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 11:49:58 AM EST
[ Parent ]
Communism: The workers pretend to work and the state pretends to pay them.

Capitalism: CDS buyers pretend to buy insurance and CDS sellers pretend to sell it.

Hm, not as catchy.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES!

by A swedish kind of death on Thu Jun 16th, 2011 at 04:16:06 PM EST
[ Parent ]
Is the ECB the main creditor of the Greek government?

That's what I read somewhere last week; to the tune of €50 billion.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Jun 15th, 2011 at 02:27:02 PM EST
[ Parent ]
German banks most exposed to Greek debt, data show - Hurriyet Daily News and Economic Review
Greece's total debt is 340 billion euros, according to data compiled by Bloomberg. The 7.4 billion euros in Greek government bonds held by FMS Wertmanagement, which is winding down assets of Germany's Hypo Real Estate Holdings, weren't included in the BIS figures because FMS isn't a bank. Neither were the holdings of the European Central Bank, or ECB, estimated at 50 billion euros by Citigroup. Greek banks own about 60 billion euros of the country's debt, according to Goldman Sachs.


*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Jun 15th, 2011 at 02:33:27 PM EST
[ Parent ]

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