IIF director Charles Dallara says ECB will be insolvent and costs may exceed 1 trillion if Greece exits the euro...So , I think SYRIZA is correct to call the Troika bluff here.

http://globaleconomicanalysis.blogspot.com/2012/05/ecb-will-be-insolvent-and-costs-may.html

Friday, May 25, 2012 4:56 PM

"ECB Will be Insolvent and Costs May Exceed 1 Trillion Euros" Says IIF Director; If the ECB Prints, Would Germany Exit the Euro?

According to IIF director Charles Dallara in a Bloomberg interview, "ECB will be insolvent if Greece were to exit the euro. Europe would have to first and foremost recapitalize its central bank."

Excuse me for asking but how would they attempt to do that? Print Euros?

Please consider Dallara Says Greek Euro Exit May Exceed 1 Trillion Euros 

 The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the group’s managing director said.

The Washington-based IIF’s projection from earlier this year is “a bit dated now” and “probably on the low side,” Charles Dallara said in an interview in Rome today. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.” 

The European Central Bank’s exposure to Greek liabilities is more than twice as big as the ECB’s capital, said Dallara, who represented banks in their negotiations with the Greek government on its debt restructuring. As a result, he predicted the bank would be unable to provide liquidity and stabilize the euro-area financial sector.

“The ECB will be insolvent” if Greece were to exit the euro, Dallara said. “Europe would have to first and foremost recapitalize its central bank.”

In February, the IIF estimated that Greece’s liabilities, in the event of a euro exit, could be crippling. “It is hard to see how they would not exceed 1 trillion euros,” the group said in an internal Feb. 18 report that hasn’t been made public.

It’s not clear whether Spain will need a bailout as it seeks to help its banks weather the euro crisis, he said.

“The only way to help markets see past that obscurity is to remove the cloud of uncertainties of national fiscal position and move toward unification,” Dallara said.

Suspect Thinking or Purposeful Fear-mongering?Since it is perfectly clear that Spain is an untenable situation, and since it is equally clear that unification is not going to happen and would not solve numerous problems, one has to wonder about the rest of his analysis as well.

However, Dallara's statements regarding ECB exposure to Greek liabilities rings true, so let's assume the trillion+ euro figure is correct. 

Just where is Europe to get that?

Greece Exit Manageable?

One needs to balance Dallara's statements with statements from Germany that a Greece exit is manageable. For example The Telegraph reportsBundesbank says Greek euro exit would be 'manageable' 

 The impact of a Greek exit from the eurozone would be substantial but "manageable", Germany's Bundesbank said, raising pressure on Athens to keep its painful economic reforms on track.

Echoing German political leaders, the Bundesbank warned against Europe easing the conditions for Greece to access aid.

"Attempting to kick-start the economy in the short term and putting off consolidation efforts in the long term are not conducive to regaining lost confidence."

Counterbluff?

Bloomberg reports Greek Euro Exit ‘Manageable’ for Markets, BdB German Banks Say

 A German banking association that represents Deutsche Bank AG (DBK), Commerzbank AG (CBK) and more than 200 other lenders said investors are prepared should Greece leave the euro area.

“It would be manageable for markets,” Andreas Schmitz, president of the BdB Association of German Banks told reporters in Frankfurt yesterday. “The risks have largely been priced in. A Greek exit would bring lower risks than two years ago but is not to be underestimated.”

Priced In? Who is Bluffing Whom?

The question is: who is bluffing whom or do they all believe these contradictory statements?

In response to What if Tsipras is Not Bluffing? Who Holds the Upper hand? What is Troika's Biggest Fear? Can Greece Possibly Stay in the Eurozone After Default? my friend Pater Tenebrarum pinged me via email with this set of statements.Whether they are or are not right about this, the Germans now believe that the euro area can survive a Greek exit. Tsipras can really threaten them with nothing. It's a miscalculation, he underestimates how desperate the political mood in Germany and elsewhere has become. 

If Tsipras goes through with his threat, Greece will be cut off from ELA and TARGET-2 and that will be that. Check my Catch 22 Revisited post.

The Germans have had enough, and so have many others - primarily Portugal and Ireland, who are furious that the Greeks are threatening to drag them down with them. 

The chances of Greece getting kicked out have risen to 85% in my opinion. 

Desperate Political Mood

Perhaps Germany misunderstands the desperate political mood in Greece. More importantly, given the politically charged emotions, does anyone understand anything or is it all a pack of lies and suppositions everywhere? 

If the ECB Prints, Would Germany Exit the Euro?

If Tsipras wins the June 17th election (I think it is a 60+% chance) then if the ECB would be made insolvent as Dallara suggests, what would Germany do? What would the ECB to do?If the ECB prints, would Germany leave?

Thus it is not so simple as to say "Germans have had enough" given that Mario Draghi sits as ECB president. Would Germany exit the euro if Draghi takes a course of action Germany does not agree with?

Those are the questions at hand now. Clearly the questions have escalated in significance.


and....


http://www.ifre.com/contingent-sovereign-liabilities-a-landmine/21020016.article

Contingent sovereign liabilities a 'landmine'

IFR 1935 26 May to 1 June 2012 | By Christopher Spink

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ABN AMRO’s refusal of Greece’s offer to exchange notes issued by certain state-owned companies with a nominal value of €1.3bn for a range of securities, at 46.5% of the old bonds’ par value, has highlighted the difficulties of restructuring paper guaranteed – but not issued – by a sovereign.

The problem could become immense, as research by Houlihan Lokey has found that while on average eurozone countries have directly issued debt equivalent to 84% of their GDP, sovereigns are ultimately responsible for additional liabilities worth 40% of their GDP on average.

Lee Buchheit, a partner at law firm Cleary Gottlieb, which advised Greece on its €205bn debt swap using the so-called private-sector involvement mechanism, has noted the dilemma of whether to restructure such contingent debts in a paper jointly written with Mitu Gulati, a professor at Duke University.

“Leaving large contingent liabilities out of the main debt restructuring may plant a landmine on the road to debt sustainability once the restructuring closes,” said the duo in a research piece shortly to be published.

ABN AMRO said it had voted against Greece’s proposals as “there seems to be no consistency in the corporate government-guaranteed loans and notes appearing on the list”. The PSI included some but not all the bonds issued by Hellenic Railways and the Athens bus company.

“Leaving large contingent liabilities out of the main debt restructuring may plant a landmine on the road to debt sustainability”

However, none of the “guaranteed” debt issued by Greek domestic banks, with an estimated par value of €83bn, was included. Three-quarters of eurozone contingent sovereign liabilities relate to bank guarantees, including national deposit schemes.

Such guarantees mushroomed after Lehman Brothers failed in September 2008, prompting domestic lenders to rely on state backing for their funding needs.

Maximum effect

Fortunately, peripheral eurozone countries in general tend to have fewer contingent liabilities than those at the core, which have long utilised their Triple A ratings to maximum effect.

Before the debt swap, the nominal value of Greece’s sovereign debt was 143% of its GDP and it was standing behind further liabilities with par value of a further 32% of GDP, according to Houlihan Lokey.

But the firm estimated that France was guaranteeing debt with a nominal value of 74% of GDP on top of its direct issuance of 82% of GDP. That nearly doubles its outstanding debts, and includes its backing of “off-balance sheet” state vehicle CADES as well as others.

If all contingent liabilities were included, it would knock convictions that restructurings such as that of Greece would make its debt “sustainable” at 120% of GDP. The latter figure only includes direct debts.

“It’s an extremely difficult issue,” said one sovereign debt specialist, adding that the guaranteed bonds included in Greece’s PSI were “those where the market had long understood that the primary obligor was unable to pay and in reality the state as guarantor was responsible”.

“The bonds had become a proxy for the state and were not really ‘two-name’ issues,” added the specialist.

ABN AMRO’s stance was interesting as it is itself owned by the Dutch state following its effective rescue in late 2008. As such, it could claim to be part of the official sector, like the ECB and eurozone countries that have so far refused to accept haircuts on their loans to Greece.

NL Financial Investments, the Dutch agency responsible for managing ABN, did not immediately respond to requests for comment.

http://www.ifre.com/spanish-banks-face-squeeze/21019754.article

Spanish banks face squeeze

IFR 1935 26 May to 1 June 2012 | By Gareth Gore

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Spanish banks may need further long-term loans from the European Central Bank, according to bankers advising such firms, after clients withdrew deposits and some lost money investing in government bonds, leaving them without sufficient funds to pay back debt maturing this year.

Lenders in the country took the largest slice of the €1trn loaned out to banks under the ECB’s two three-year longer-term refinancing operations, and currently owe €317bn to the central bank. Much of that cash is now spoken for, with bankers estimating only between €60bn and €90bn of cash being left.

With about €85bn of debt maturing in the second, third and fourth quarters, some smaller banks may need to find extra cash. Unlike their larger peers, smaller Spanish banks remain locked out of private funding markets and have been unable to sell assets, leaving the ECB as their only real option.

“Liquidity is a big concern,” said the head of Spain at one investment bank advising lenders. “Some have money to get them through the summer, but by the autumn if we haven’t seen additional measures then they could be in a very difficult situation.”

“The only way out is another bazooka,” he said, adding that some banks will need further loans from the ECB and a possible injection of capital.

Reforms announced by the Spanish government two weeks ago – the second overhaul of the banking system in just three months – were mainly aimed at bank solvency. While bankers advising lenders have welcomed the attempt to restore confidence, privately they say that liquidity is a far more pressing issue.

Not all banks are under stress, however. Larger firms such as Banco Santander, BBVA, La Caixa and Banesto have all been able to sell bonds this year, boosting liquidity – and giving them more breathing room – as they seek to clean up their balance sheets after Spain’s property boom imploded.

“Some have money to get them through the summer, but by the autumn if we haven’t seen additional measures then they could be in a very difficult situation”

Fitch Ratings is one institution that thinks the ECB will have to launch a third LTRO. Bankers say that, while shorter three-month, one-month and one-week ECB lending programmes remain in place, they won’t provide the stability of funding that banks need.

“The likelihood that a third LTRO will be needed by certain banks in peripheral eurozone countries is increasing due to worries over eurozone sovereigns, limited deleveraging ability and flat-to-negative deposit trends,” said James Longsdon, a managing director in Fitch’s financial institutions group.

Put to use

Although Spanish banks borrowed big under the first two LTROs, much of the money has already been put to use. Many used the cash to replace existing credit lines – JP Morgan estimates that Spanish banks only took €166bn in net borrowing at the December and February operations, and that only €90bn of that is left.

Others are more pessimistic. The Spanish investment banking head quoted above, who has been advising dozens of Spanish lenders, estimates that lenders have about €60bn left. Banks from the Mediterranean country had €53.4bn deposited at the ECB in April – down from €88.7bn in March – but may have additional reserves too.

Many banks took enough to see them through a year or two of debt maturities. But instead of sitting on the cash until the debts came due – and suffering the negative carry – many chose to temporarily invest in Spanish and other government paper. ECB data show Spanish banks hold €260bn in eurozone government debt, up €85bn since November.

That helped bring down Spanish 10-year government bond yields from 6.9% in November to 4.8% in March. But since then, prices have plummeted and yields have once again begun to climb, reaching 6.5% earlier this month. As a result, banks may be unable to sell those holdings to generate cash without taking big losses.

“The absurdity is that banks used the money to buy the bonds of their own governments,” said one London-based financial institutions banker who is also advising Spanish banks. “Some bought longer-term bonds because of the extra yield and now face some huge losses.”

“LTRO money was taken out to repay maturing unsecured debt, and funds were placed in bond markets until they were needed to repay funding,” Nomura fixed income analysts wrote recently, adding that quantitative easing and asset replacement from banks – not another LTRO – were needed.

Lack of collateral

Complicating matters is the fact that Spanish banks may lack collateral of sufficient quality to borrow more money from the ECB, even if a third LTRO were launched. Deutsche Bank believes Spanish banks may be getting constrained, but says that authorities could lower the quality threshold further – as they have done repeatedly in the past.

There is also potential that further downgrades of Spanish debt or other assets could prompt a series of margin calls, worsening banks’ cash and collateral positions.

Mindful of their situation, banks have recently been trying to free up cash by selling industry holdings and other assets, but bankers involved in those attempted sales say banks are unwilling to accept market prices. Spain’s benchmark Ibex 35 equity index slumped to its lowest since 2003 this month.

“Equity markets aren’t helping,” said the Spanish investment banking boss, who asked not to be identified. “If banks were to sell they would make a loss, so they can’t do it. These assets are no longer in-the-money so they would be shooting themselves in the foot. They would be in a worse position.”

Another source of hope is that European leaders may decide to recapitalise Spanish banks, but there has been resistance to that so far. An LTRO, with reduced collateral requirements, may be the most politically palatable option for now.