Thursday, January 12, 2012


Messed up the column again yesterday.  Sorry.  Google and I just don't get along.

Anyway, what I tried to say was that buried deeply in the revelations of the ECB at the end of the year were the conditions relating to eligible paper taken by the ECB as security for the funding of Euro banks in operations such as the 3 year extention of credit announced two weeks ago.  I'll be brief: anything goes.  It would appear that banks can create paper out of whole cloth in exchange for funding; their own obligations for example whinch in turn can be exchanged for direct funding secured by their own obligations!  It's a joke, but what is also remarkable is that how, in times like this the very same insanities that occured in like-times past re-occur with scant notice much less recognition.  For example in the late eighties, Mexico, which had nationalized it's banking system decided to return it to the public sector and allowed investors to borrow money for the repurchase of the banks from the government by borrowing the funds from the same banks and securing the loans with the bank shares which had been--or were about to be--purchased!  This of course led to another round of bank failures, another nationalization or two and future privatization resulting in a favored few becoming insanely rich, the government receiving massive funding and ministers of all shapes and sizes bying waterfront property in Cabo and Chalets in Vail.  A good time was had by all.  Let me hasten to say that the Euros are not any where near being so venial but hardly exempt from bad ideas.

At least we now know what the game is going to be.  At first the new deposits went straight back to the ECB but that appeared to change today.  Spain and Italy both offered short date paper; the Spanish a new 3 year maturity and a 4 year.  The Italians a 12 month note.  Both offerings were well-received with the Italian yield nearly halving to 2.78% and the yield of the ten year on the run bond dropping from 7.13% to 6.53% last time I looked.  So I called Massimo just to check it out.

"Who bought the stuff?"

"Charlie, you no get like your Pazzo friend, eh.  The banks of course."

"So they fell in line."

"Ma sure.  Like I tell you and they gonna do it again and again and again."

"Until the money runs out."

"Charlie, the money...she's not going to run out.  Mario is going to do this again ma, bigger, much bigger."

And in the world according to Massimo there you have the grand strategy.  Somebody (guess who) has figured out how much the Italians, the Spanish, the Portuguese can afford to pay over the next 3 years in bond yields, the ECB will fund the banks who will buy the bonds and pledge them back to the ECB, the banks will pocket the spread between the 1% they pay the ECB and what the bonds yield thereby recapitalizing themselves by which time growth will have returned to the Euroland and all will live happily ever after.

Of course, the 17 have to agree to a fiscal union within a month, the Greeks have to get their restructuring completed on a "voluntary" basis, the recession in which Euroland finds itself right now can't get too deep, there can't be any riots come the spring elections and the growth so needed has to be financed somehow on a continent where there is no private capital available whatsoever whilst relying on a Central Bank whose balance sheet is up around 5 TRILLION Euros supported by absolutele crap.  Then again, it would also be useful not to have a break-out of hostilities in the Gulf, a down-grade of France, a political mess in the USA  or a Hungarian collapse among other events while all of this is going on...just to insure it's success.  As the kids say, I'm down with that.

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