Rik made mention of a very current and important topic regarding last week's announcement of 3 year unlimited collateralized loans that the ECB extended to banks. Ostensibly, this was to preserve liquidity. However, there has been some discussion of how it could turn into a form of QE.
FT Alphaville has done a post about this, and so did John Hussmann.
Other issues this raises are how much exposure this gives the ECB to crappy collateral? FTAV has a related post here. What kind of haircut is the ECB giving to hold this collateral? How much of this borrow-buy carry trade is actually taking place, and which banks are involved? What effect would further margin requirement hikes by the likes of LCH Clearnet have on this situation? How will this kind of leverage affect the other market activities of the broker dealers? (see FTAV)
I'll leave you with a link to a post on a great Australian Macroeconomic Blog I found: France is next
FT Alphaville has done a post about this, and so did John Hussmann.
. In relevant part,
it reads:
"We've seen some theories that Europe intends to
address the problem through ECB lending to banks, taking distressed debt as
collateral, with the banks turning around and buying more distressed debt.
Apart from the fact that this would be the sort of "legal trick" that
the ECB would be unwilling to facilitate, this would imply an increase in bank
leverage ratios far beyond the 30-40 multiples that already exist (which would
be a disaster when tighter Basel III capital requirements kick in). In practice,
depositors would flee, and you would end up with a European banking system
where bank bondholders, not the ECB, would be subject to the losses, since the
ECB's collateral claims would be senior. Likewise, IMF loans are always highly
conditional, and are always senior claims."
I agree with Hussmann's assessment. This would really be ass-backwards QE, IF it
happens. With the FED, the PD's buy the
bonds, and then the FED buys them in the secondary market from the PD's. In the end, it is the FED, with its
"infinite" balance sheet that becomes leveraged. In the SARKO variety, the ECB extends
non-loss bearing loans to banks which then have to lever up their own balance
sheets even more to buy these instruments.
In the FED case, bank get capital injections and the CB gets HTM
paper. In the ECB case, banks take on
senior loans, offering very volatile sovereign paper as collateral.
As Rik mentioned, this is real last Euro lottery there, - or Russian Roulette
with five rounds in the chamber.
