26 Oct 2011

The Beginning Of The European Endgame

ECB Bond-Buying Should End With New EFSF, German Motion Says

I think this is one of the most important bits of news on the day. This and the fact that the Dutch finally said something - and it wasn't positive.

I have been arguing that the solutions create contagion rather than prevent it. I've also argued that the ECB and EFSF and to some extent the IMF are all the same pools of money.

Now that Europe has actually tried to do some calculations, which it is apparent that up until last week, they hadn't done, they are coming to the same conclusion.

On Friday the "haircuts" on Greece get serious. No more bogus high coupon principal protected notes - but real notional reductions of 50 per cent or more.

I believe the ECB has a portfolio of 55 billion of Greek debt. If average price was 80 then that is a 16.5 billion actual loss.

ECB, unlike our beloved FED, doesn't want to just print money so they make a capital call on their members. Yes, the same members that back the EFSF.

How many of those members even remembered the ECB can call for additional capital (it's why they are so happy to employ the double down don't frown trading strategy).

The terms of ECB capital calls are worse than EFSF because they are joint and several. If countries don't meet their obligations they don't go away, they get passed to another country.

So as ECB loads up on PIIGS debt and losses or haircuts would be paid for by the non problem countries - in addition to their EFSF obligations.

Germany maybe has learned not to overextend and is scared to pile this (previously ignored) liability on top of it's EFSF guarantees. At least EFSF is something they have control over.

France I think was planning on loading up the ECB with so much debt they would just capitulate and print money.

Other people have more knowledge of the ECB but the ECB has things in common with the FED but also has similarities to the EFSF. I think this is an important turning point for the politicians in Germany and other prudent countries and they are trying to limit how much they can lose in this last ditch attempt to avoid making countries and banks and investors pay for their mistakes.

From Bloomberg:

ECB’s Need for Bond-Buying Should End With New EFSF, Bundestag Motion Says

German lawmakers are set to vote on a non-binding call for the European Central Bank to end its secondary-market bond-buying program once the enhanced European rescue fund is enacted,

The joint motion, agreed on by the government parties and the main opposition in Berlin today, sets out terms for the lower house, the Bundestag, supporting the European Financial Stability Facility in a vote tomorrow. It “notes that the need” for the ECB to continue its secondary-market program ends with the new fund’s enactment and urges Chancellor Angela Merkel’s government to “respect” the ban on central-bank credits as well as primary-market purchases by the ECB as the EFSF is set in stone.

“For us it was a condition that the Bundestag, respecting the central bank’s independence, has a clear position: no more unconditional debt-buying by the ECB,” Carsten Schneider, the opposition Social Democratic Party’s budget spokesman in parliament, told reporters after a budget committee meeting.

The motion sets criteria to which Merkel must adhere when she goes to Brussels after the EFSF vote tomorrow for a second European summit in four days. The budget committee or the full chamber must be allowed to vote once more after leverage models have been transformed into guidelines for the fund, according to the text. It also stipulates that systemically important banks re-capitalize by June 30, 2012.

‘Non-Standard Methods’

Merkel said earlier today that Germany opposed the inclusion of a reference to the ECB continuing its bond-buying program in a draft text prepared for tomorrow’s summit. While officials are still working on the text, “the wording doesn’t state that there should be more secondary-market purchases, but rather that the non-standard methods of the European Central Bank could be pursued further,” she said.

The motion, drafted by ruling coalition lawmakers and distributed to reporters by Merkel’s Christian Democratic Union, aims to attract the broadest possible support from the opposition Social Democrats and Greens in tomorrow’s vote by seeking to curtail the potential demands on German taxpayers of the enhanced fund.

These include ensuring strict adherence to the EFSF’s guarantee framework, with a cap on German guarantees at the existing level of 211 billion euros ($293 billion), and ruling out “optimizations” of the EFSF that can alter its framework treaty.


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