Commerzbank is pulling its repo’s from Greek Banks. Not a headline to set the pulse racing. Though it should.
Repo agreements between banks are the essential liquidity that keeps banks running day to day. Commerzbank is one of the largest repo counterparties for Greek banking. Not only is it withdrawing its repo agreements but dumping its holdings of Greek bonds. Other banks are allegedly doing the same. This was the news yesterday at bankingnews.gr as picked up by Zerohedge and The Market Ticker. (In my opinion, and my few contacts in Germany concur, Commerzbank is their RBS)
According to the report Commerzbank had decided the ‘assets’ the Greek banks had put up as collateral were not in fact worth what the Greek banks had claimed for them.
This is EXACTLY what happened in the run up to Lehman’s collapse. Its counterparties also, began to doubt the real value of the assets Lehman was offering. Once that happened Lehman was dead in the water.
Without repo no modern bank can function – without, of course, a government stepping in. The Greek governemtn can’t step in because it too is bankrupt. Bailing the Greek banks means turning to Germany, France and Switzerland. Those are the three nations whose own banks are most exposed to Greek debt. That is, they have bought the most of it and made the greatest loans to Greek banks.
The hope has to be that those three nations calculate, that the exposure of their own banks to Greek bank debt means, that a bail-out of Greece is essentially a bail out for their own banks. This, rather than european solidarity is the only really likely spur to a european bail out. Other than that Greece will have to turn to capitalism’s version of the Spanish Inquisition – the IMF. Like the Inquisition the IMF will save your soul but usually at the cost of your mortal body. We burn you at the stake but forgive you your sins.
It’s not surprising that once Greece got a look at the terms the IMF was going to demand in return for IMF money, the Greek government actually started backing away from it’s earlier calls for IMF help.
So far the bond markets have pushed up the rate for Greece to borrow from 6.5% to 7.1%! ( UPDATE – Thursday it went to nearly 7.6%!!) That is more than twice what Germany pays to borrow. The critical thing to remember here is that at this rate, let alone higher, it DOESN’T MATTER IF GREECE BORROWS OR NOT. Because at any rate above 4.5% the money it has to pay on what it has borrowed, makes their situation WORSE. The cost of borrowing above 4.5% means they would have to make far deeper cuts than they are planning and those cuts will DECREASE their GDP which will in turn mean they will need to borrow more. This is a debt death-spiral and the bond market knows it.
(UPDATE – Cost of insuring Greek debt is now MORE than insuring Iceland’s debt!)
The Greek answer? They’ve said they are going to go on a mission to the US and China to convince investors out there to buy Greek debt. They are going to issue the debt offered in the US, in dollars. Which means any drop in the euro against the dollar multiplies the cost of repaying that debt. I think this is a russian roulette kind of bet.
As far as I can see there just isn’t any salvation on offer for Greece. The cuts in the IMF’s austerity plan would be even more draconian than the cuts involved in Germany’s plan. And it’s not sure, when push comes to shove, that there is any real German plan. There is talk of a plan and, I suspect, the hope that talk will be sufficient on its own, to calm the markets. The talking cure is what Poulson tried. It failed and Lehman, Fannie and Freddie all fell over. Why would a talking cure work now?
In my opinion, Germany, can’t bail Greece out, unless it can do it in such a way that: 1) doesn’t cause political melt-down in Germany, 2) Doesn’t give the market vultures like Goldman and the other big banks (including their own)an open goal to front-run other european, national bail-outs. I don’t see a credible way this second point can be achieved.
Once the vultures see that euro nations will be bailed then it’s a green light for taking huge CDS bets against one nation after another. Those very bets will precipitate the crisis in borrowing costs for those nations, which the bets are designed to cash in on. And the vultures will make mundreds of virtually risk free billions.
Seems to me, that what I was calling the ‘Argentina’ plan, is unfolding.
In the end I think the Germany in particular is likely to be working behind the scenes for a way of expelling Greece form the euro. Perhaps dressed up as some kind of probationary cobblers. Once that happens, Greece devalues. How this can happen when Greece is using euros and has no actual currency of its own printed up I don’t know. Certainly such practicalities make what I am proposing VERY difficult to see in practice. It’s just that the other options seem even less palatable.
But if Greece was expelled and did devalue then the German’s, the French and Swiss would all have to bail-out their own banks. What makes me think all those nations would prefer this solution (if the practicalities can be worked out – a BIG ‘if’ I know) is that I bet they would all prefer to bail out their own banks rather than the Greek banks or government. Easier to sell to their electorate and easier to control what happened to that money. Less chance of it being swollowed up in a larger, as yet undeclared, black hole.
This is what happens when politicians start to believe that words mean more than actions.
What a joke.
There is no bail-out coming from Germany, and France is really as broke as the PIIGS. The IMF deal was only put on the table because no-one could take them up on it.
I am sure they are printing 2010 drachmas as we speak.
In a month's time I want to book our summer holiday on Kefalonia (and do my bit for the Greeks); I do not expect to pay in Euros.
Blimey Golem, I know it is spring time but do you have to be so optimistic?
Seriously, this sounds bad, really bad. Thanks for describing what could happen and how the vultures are making a mint out of all this. yet the MSM (with the exception of the FT and Hilton in the Evening Standard) fail to mention the elephant in the room.
Good job you have this blog as CiF is becoming impossible to follow these days, so much dross with very few gems to dig out.
Cheers
nopackdrill,
I too wonder if the Greeks could start to print Drachmas again. Seems so difficult to get there from here and yet the alternatives seem even less likely.
As for France I don't have any figures for how they are really doing. I would love to know.
I suspect Soc Gen is very exposed to Greek, and Spanish debt.
IanG,
Sorry, to be such a misery. I don't mean to be. In fact I'd like not to be.
What you say about CiF is a shame. I always enjoyed commenting on the Guardian. I haven't been doing so much recently because the articles seem to be less and less on the topics that seem of concern and relevance to me. What the Guardian thinks is important seems to be diverging from what I think.
If things start to go economically wrong again I am sure that will reverse.
A hung or ineffectual parliament will ensure that the bond market cuts up a bit rough for us.
Other peoples money…………
I think the Greeks default, and the French and German Banks get a bail-out. (British & Swiss Banks left wih a bruised lip)
All Euro-politicians find a way to put a shine on it, (no IMF involvement to embarrass the European bank), taxpayers (unsecured) lenders of last resort -as ever.
Golem, thank you for shining a light on the Gilts markets and how they work. It is always very enlightening to read your thoughts as the media and politicians avoid these matters at the best of times. Can I ask how you gained your strong knowledge of these matters? Are you amn Economics lecturer or wise citizen?
Thanks
Carl
nopackdrill,
Things are on the slide ofr the Greeks. bond market is looking for its pound of flesh for any more omney. And the vultures smell the chance to speculate.
The question of the moment is who is taking the other side of any CDS speculation?
Carl,
I am just someone who reads a lot and thinks as clearly as I can about what I read. My prejudice is to feel strongly that economic theory is flimsy and more like medieval theology than science. Stong on internal logic VERY thinly connected to actual reality. But serving those who follow it by justifying their position and wealth.
I am hoping this is the moment when liberal economic hegemony meets its reformation.