Derweil in Hamburg vor dem HSH Haupteingang
There is a lot of talk going on the EFSF increasing its firepower by leveraging up the current total notional of 440 billion Euro. The politicians in Germany try sell this to the people by emphasizing that Germany’s stake in the guarantee will stay at 211 billion and that the German government will not increase this in any case.
Many commentators both in the media and blogs argued that, while the notional of the guarantee stay the same, the risk increases proportional to the leverage. I agree, but I would like to point out additionally that the notional of the German stake will also increase. Not explicitly in the contracts of course, but implicitly. Just like the countries, with the notable exception of Iceland, quickly guaranteed all debts of their banking system as soon insolvency was threatening, the countries will also ride to help the EFSF if it has solvency problems.
A leveraged EFSF will be the central pillar of the European debt pyramid. It seems virtually impossible to me that Europe will ever let it default. But preventing the EFSF default means putting more money on the table. Either now or later. Politician just choose later, because it circumvents the inconvenient tour de parliaments.
At least if looking at the 10y government bonds yields:
(Source: Page 40 from this PDF)
Not entirely with the brilliance f previous editions, but great nevertheless.
Today the ECB surpirsed everyone with changes to it’s rules of egilible collateral. The following things were changed:
First, the Eurosystem has abolished the eligibility requirement (Sections 184.108.40.206 and 220.127.116.11) that debt instruments issued by credit institutions, other than covered bank bonds, are only eligible if they are admitted to trading on a regulated market.
So in plain English: The ECB now also accepts any debt instrument issued by banks even though they are not traded on regulated market and thus do not come with a market price. This is a mayor relaxation of colleteral standards. Cynics might claim that markt-to-fanansy enters the Euro monetary system. Den Rest des Beitrags lesen »