Euro Area

[Philippus Flavius Homovallumus]

Just popping in here to ask real quickly, are we still boned?

Yes.

[gaelic cowboy]

Unilaterally erasing your banks' debt is quite illegal per EU law. As the effects of that, or a default on sovereign debt for that matter, will dramatically affect financial institutions and pension funds in other countries it's not surprising that those other countries won't look kindly on such a move.

Bad investment strategies? Maybe. "We're defaulting on our debt. Don't like it? Then you shouldn't have invested in us in the first place. What were you thinking, lolz."

It's not just an abstract matter of "reduced confidence" but also a direct matter of reduced money supply when (other) banks have to write off a huge amount of assets. You could make the case that there should be a EU wide restructuring of debt, but that will disproportionately reward those countries who either made a mess out of it themselves or countries who enjoyed the benefits of large financial sectors for many years.



Fair enough. A sovereign default is not necessarily an armageddon, and restructuring/defaulting will actually make it easier to repay the remainder of the debt. But if a country defaults at a time when there's still actually hope that it could repay debt it sets a poor precedent.

You still don't get it even after all this time yer all still worried what others will think of the default. The high bond prices for Spain and Ireland are there as a result of a belief among lenders that sovereigns will deflate there economy because of the terms of the bailout. Ireland's bonds should be lower as we don't have to borrow money cos we have a bailout that means anyone with short term paper is guaranteed there money back, so why do they soar they go up because we require more and more to service an ever larger debt because of the bailout.

Spain is Ireland on steroids if ye all try the same trick again as ye did here the Euro will suffer it's biggest crisis yet and it wont have anything to do with Greece.


And honestly what financial institution would hold such paper when Merkels 2013 deadline for haircuts is coming up, this stuff has all been marked down or sold at a loss ages ago.

If you dont restructure the debt you will end up down here in the mud with us I suggest you mark it down and at least get something for it.

[Kralizec]

You do have a knack for selectively picking things that support your argument, don't you?

Debt rates are high for the simple reason that nobody wants to buy those bonds. Germany's finances are good but not that good; the near-zero rates they get now are because everybody piles on eachother to buy that paper and thus create a self-reinforcing prophesy. Spain and Italy are in trouble, but because nobody buys their bonds it paints a bleaker picture than is actually justified.

German and French banks hold massive stakes in Spanish debt. Erasing that debt means letting Spain off the hook at the expense of France and Germany. Is that difficult to comprehend?

The banking union sounds like a good idea that's long overdue.

[Philippus Flavius Homovallumus]

You do have a knack for selectively picking things that support your argument, don't you?

Debt rates are high for the simple reason that nobody wants to buy those bonds. Germany's finances are good but not that good; the near-zero rates they get now are because everybody piles on eachother to buy that paper and thus create a self-reinforcing prophesy. Spain and Italy are in trouble, but because nobody buys their bonds it paints a bleaker picture than is actually justified.

German and French banks hold massive stakes in Spanish debt. Erasing that debt means letting Spain off the hook at the expense of France and Germany. Is that difficult to comprehend?

The banking union sounds like a good idea that's long overdue.

Spain's bond yields are over 7% right now - I suggest you boys find a new solution, because the medicine you're using isn't killing the patient so much as putrifying his corpse right now.

[gaelic cowboy]

You do have a knack for selectively picking things that support your argument, don't you?

Debt rates are high for the simple reason that nobody wants to buy those bonds. Germany's finances are good but not that good; the near-zero rates they get now are because everybody piles on eachother to buy that paper and thus create a self-reinforcing prophesy. Spain and Italy are in trouble, but because nobody buys their bonds it paints a bleaker picture than is actually justified.

German and French banks hold massive stakes in Spanish debt. Erasing that debt means letting Spain off the hook at the expense of France and Germany. Is that difficult to comprehend?

The banking union sounds like a good idea that's long overdue.

If there guaraunteed there money on short term paper why are they going up then these people only care about returns.

The fact is the ECB is causing it because institutions senority in bond purchases is in danger, why pay for senior bond status if the ECB is going to effectively claim Senior Senior status.

German and French banks had 4yr to get ready for this moment and essentially the ECB, national governments and various banks did absolutely to get ready for it. The ECB is effectively saying we must reward this insanity by paying back all senior bondholders the full amount with taxpayer cash, however at the same time we the ECB must be paid first. I cannot have senior status if the ECB is ahead of me so essentially people are concluding that senior status is really junior and is in danger of a cut.

At the moment there are only two ways out of the swamp
1: cut some of it so it's lower
or
2:restructure it into new longer term bonds

both of these reduce the burden on sovereigns and increase the likelyhood of some or all of the payment.

At the minute both options are completely off the table and so that only leaves only a total default hence Spanish bonds are rising.

The market has rightly concluded that there will be a bailout of Spain as there has not in fact been an agreement to ringfence bank debt from sovereign debt

[Kralizec]

Loans/bonds granted under relief packages deserve special treatment because they're granted with the goal of keeping the country afloat and are therefore beneficial to the other creditors. One could draw a paralell with insolvent companies who are put under custody; if the business is kept running in the interim the costs of that operation are given preferential status in the case a bankruptcy does eventually occur (or at least; that's the way it works over here)

Sovereign bonds have traditionally been seen as a safe investment with low returns. France, the Netherlands and especially Germany have recently even sold bonds with negative nominal interest rates - for the plain simple reason that investors in bonds do not generally care about large returns but do care about getting at least their nominal investment back. Spain and Italy's rates are high because bond investors are generally risk averse.

Banks are not the only problems of the Spanish, but also their autonomous regions who they can barely reign in.

[gaelic cowboy]

Loans/bonds granted under relief packages deserve special treatment because they're granted with the goal of keeping the country afloat and are therefore beneficial to the other creditors. One could draw a paralell with insolvent companies who are put under custody; if the business is kept running in the interim the costs of that operation are given preferential status in the case a bankruptcy does eventually occur (or at least; that's the way it works over here)

nice parralell but a country is not a company as no company sells the majority of it's goods to it's own employees. And the costs in this case will be born by the taxpayer of said country and not the lender.

Sovereign bonds have traditionally been seen as a safe investment with low returns. France, the Netherlands and especially Germany have recently even sold bonds with negative nominal interest rates - for the plain simple reason that investors in bonds do not generally care about large returns but do care about getting at least their nominal investment back. Spain and Italy's rates are high because bond investors are generally risk averse.

And there now even more risk averse than before as they have concluded that Spain will be forced to become a bailout country due to the fact that bank debt will not be kept separate from sovereign debt.

This has increased the likelyhood that no will get paid because effectively were trying to pay everyone.

[phonicsmonkey]

negative nominal interest rates

I think you mean negative real interest rates ie. a small positive nominal rate which, when adjusted for inflation, becomes effectively negative

sorry to be a pedant

[Kralizec]

I think you mean negative real interest rates ie. a small positive nominal rate which, when adjusted for inflation, becomes effectively negative

sorry to be a pedant

Well, yes, but I gather that most bonds include an interst rate and, seperately from that, an inflation-protection clause (a variable percentage of interest that's linked to actual inflation). I should have been clearer.

[Philippus Flavius Homovallumus]

Well, yes, but I gather that most bonds include an interst rate and, seperately from that, an inflation-protection clause (a variable percentage of interest that's linked to actual inflation). I should have been clearer.

All the situation for Germany, I do not believe it applies to France, indicates is that the market is broken - Germany's rates are a result of people buying nothing else AND the Bundusbank hoovering up ALL spare debt on the secondary market.

[SoFarSoGood]

German Target2 exposure is over 700bn euros. IF the southern Europeans leave that debt defaults.

[gaelic cowboy]

German Target2 exposure is over 700bn euros. IF the southern Europeans leave that debt defaults.

How? if you leave the debt is still in Euro and since it is in fact the ECB that is owed the money it can just delete the word debt on it's balance sheet and insert the word asset.

Plus most of this is either capital flight from weaker country banks or normal day to day trade ie paying German exporters for there products.

And in any case using the word debt and owed in relation to target2 is faulty as target2 is not a debt, the increase in the money supply in Germany will be mirrored by a reduction of the same amount in Italy.

[SoFarSoGood]

If I owe the bank £100 it's my problem. If I owe the bank 700bn euros it's the banks problem. To call the Target2 money owed an 'asset' presumes you be repayed but that is precisely the problem; the southern europeans are having trouble supporting their own economies without Target2 payments. It is therefore an 'exposure'.

So what happens if the southerners leave the euro? They revert back to their own currencies and devalue. Yes Germany might recover the Target2 exposure but if it is still denominated in euros it would take centuries to repay in new Liras and Pesatas etc. It's certainly not going to be payed back as it is supposed to be now and as the new sovereigns would not be run by the ECB but by their own national banks.

700bn euros missing from German banks... As I said it's the banks problem.

[Philippus Flavius Homovallumus]

Only if they need the money - if the debt has already been written off it will not be a real issue

Money is just an idea, it isn't worth anything beyond the institution that backs it.

http://www.telegraph.co.uk/news/poli...tra-to-EU.html

2.8% increase in the EU budget while national governments slash spending.

Fire the entire bloody parliament, I say.

[InsaneApache]

The EU certainly knows how to royally take the piss.

[Fragony]

The EU certainly knows how to royally take the piss.

Looking forward for the moment where they are amazed that they will actually get hanged.

[gaelic cowboy]

If I owe the bank £100 it's my problem. If I owe the bank 700bn euros it's the banks problem. To call the Target2 money owed an 'asset' presumes you be repayed but that is precisely the problem; the southern europeans are having trouble supporting their own economies without Target2 payments. It is therefore an 'exposure'.

So what happens if the southerners leave the euro? They revert back to their own currencies and devalue. Yes Germany might recover the Target2 exposure but if it is still denominated in euros it would take centuries to repay in new Liras and Pesatas etc. It's certainly not going to be payed back as it is supposed to be now and as the new sovereigns would not be run by the ECB but by their own national banks.

700bn euros missing from German banks... As I said it's the banks problem.

It's pretty obvious you dont understand what target 2 actually is because that is is basically completely wrong. The money is owed to the ECB and the payment has already being made so any reversion to Lira does not wipe your target 2 credit/debit out.

Target 2 is a payment system between euro area banks by using there national central banks using the ECB to credit or debit each national central bank account. No money is actually created here as this money is already in circulation and it is basically the normal to and fro of any national payments system.

The only exposure I have ever read or heard about is if the EURO might ever get dissolved as this would would wipe out the ECB as it can only print EURO. However the ECB would naturally have already printed all the EURO it needs to credit any account before it was wound up so I don't see how this can actually happen in reality.

Also on a potential dissolution the payments to the ECB would have to be shared by each of the national central bank according to there share of the ECB.

So actually having an overly large target 2 is a good thing as your only liable for your share of the ECB and not your share of the money.

[SoFarSoGood]

The southern banks have NOT repayed the ECB, which in turn should pass them on to the Bundesbank. The real the collateral held at the Bundesbank is decreasing.

[gaelic cowboy]

The southern banks have NOT repayed the ECB, which in turn should pass them on to the Bundesbank. The real the collateral held at the Bundesbank is decreasing.

Actually they have PAYED by the ECB because that's how target2 works.

Goods, services or even deposits are lodged to crossborder accounts so the Bank of Greece tells the ECB to debit it's account and credit the Bundesbank one at the ECB.

The Bundesbank has a high target 2 meaning they are being paid for goods and services etc etc which probably indicates a high current account surplus in the German domestic economy allied with capital flight to German banks.

The Bundesbank is not lending this money it is in fact being payed this money by the ECB who just delete or input a few numbers on a spreadsheet.

And reduction in capital is merely an indication of the reduction of German assets nationally of say cars, washing machines or tractors finding there way to say Spain after payment.

[SoFarSoGood]

So how come it is reported, even by the Bundesbank itself, that Germany is over exposed to Target2 repayment? There appears to be some divergence between your utopia (which is of course how it should work) and the reality. But nothing new there in the euro fiasco...

[phonicsmonkey]

Well, yes, but I gather that most bonds include an interst rate and, seperately from that, an inflation-protection clause (a variable percentage of interest that's linked to actual inflation). I should have been clearer.

Not quite. Most bonds have a coupon which is fixed at the time of issue, relative to market interest rates. At that point, the coupon interest rate will contain a component which reflects the market's expectation for inflation. However, the coupon does not change with subsequent changes in inflation expectations. Hence fixed interest securities like bonds are particularly negatively impacted by inflation.

Unless it's an inflation-linked bond where the coupon varies directly with changes in the inflation rate, but they are a very small subset of the total bonds on issue.

The point you were making was that G3 (US, Germany and Japan) bonds are currently being issued at negative real interest rates. Which means that if you examine the fixed coupon they are being issued at and deduct the expected inflation rate the result is negative. In effect the 'borrower' is being paid by the lender for the privilege of taking their money.

Such is the distortion of markets caused by terror. The return of capital has become more important than the return on capital.

[SoFarSoGood]

Spanish 2 year paper now trading at 6.74%... Which means that for Spain to use 2 year bonds to borrow they would, in order to repay profitably, have to be growing at around 7%. Evidently they are not which is why Spain is effectively blocked from the markets.

[gaelic cowboy]

So how come it is reported, even by the Bundesbank itself, that Germany is over exposed to Target2 repayment? There appears to be some divergence between your utopia (which is of course how it should work) and the reality. But nothing new there in the euro fiasco...

What Germany is talking about in Target 2 is how dangerous its position is in relation to the current account surpluses it runs against other Eurozone menbers. These surplusses are due to countries having to trade with Germany for goods while Germany buys little from them, all that could dissappear IF the Eurozone were to be wound up.

A huge part of the Germany economic strength at the minute is built on the fact there is on there been no currency differential between EZ member states.

Basically your incorrect in your assertion that Germany could lose money on payments it has already recieved, the danger for Germany is to future trade which is why no one will get kicked out of the EURO.

These lunatics will quite litterally fight to the last indoctirnated zealot to keep it going.

[gaelic cowboy]

Spanish 2 year paper now trading at 6.74%... Which means that for Spain to use 2 year bonds to borrow they would, in order to repay profitably, have to be growing at around 7%. Evidently they are not which is why Spain is effectively blocked from the markets.

Indeed as I feared the deal on Spanish banks was nothing of the sort and baring a solution to this crisis we should get a Spanish bailout by the backend of this year.

I would have thought though that the figure needed for repayment would be closer to 3.5% as they are 2yr bonds after all.

[SoFarSoGood]

What Germany is talking about in Target 2 is how dangerous its position is in relation to the current account surpluses it runs against other Eurozone menbers. These surplusses are due to countries having to trade with Germany for goods while Germany buys little from them, all that could dissappear IF the Eurozone were to be wound up.

A huge part of the Germany economic strength at the minute is built on the fact there is on there been no currency differential between EZ member states.

Basically your incorrect in your assertion that Germany could lose money on payments it has already recieved, the danger for Germany is to future trade which is why no one will get kicked out of the EURO.

These lunatics will quite litterally fight to the last indoctirnated zealot to keep it going.

You are mistaken when you say that the Target2 repayments have been made. It was being repayed when all was hunky dory but that is precisely what is indicated by the phrase 'Target2 exposure'; it has not been payed. It is an 'asset' should it be repayed but for any chance of that the system has be kept going, which of course requires ever more money. Seriously how can Greece make Target2 payments to the ECB when it relies on ECB/IMF drip feed anyway? I know that the 'troika' loans to Greece enjoy 'seniority' to other bond holders but wouldn't it be a little self defeating to have German exports to Greece (which is actualy relatively small) propped up 'troika' loans? If it was all tickety-boo and the 700bn euros had "already" been repayed then I agree it wouldn't be a problem. It hasn't though and thus it's an "exposure".

In theory if Greece (for example) left the euro Germany would be able reclaim it's Target2 money from the ECB. "Consider an example for Germany and Greece. Germany provided about 27 percent of the capital of the ECB provided by countries belonging to the euro area (Bank of Spain 2012). Greece's TARGET2 balances are on the order of 100 billion euro. If something happened and those balances became worth half, losses would be 50 billion euro and Germany's exposure 27 percent of that, or on the order of 13 billion euro, a far cry from what might be suggested by its TARGET2 balance of approximately 500 billion euro. Furthermore, Germany's TARGET2 balance itself could be zero and the loss would be the same in this example. It is the net exposure of the ECB to countries that determines any risk associated with TARGET2." (Gerald Dwyer)

In a way you are right; the ECB suffers, not Germany but as most of the loans handed out by the ECB and therefore debts owed to the ECB are German money... See my point?

Indeed as I feared the deal on Spanish banks was nothing of the sort and baring a solution to this crisis we should get a Spanish bailout by the backend of this year.

I would have thought though that the figure needed for repayment would be closer to 3.5% as they are 2yr bonds after all.

Recently actual auctions of both Spanish and Italian bonds have been slightly under the market trading price. I believe the last 10 Italian auction was arounf 5.4% but don't recall offhand whereas it's quoted nearer 6%. So although Spanish 2 year paper is trading for 6.7% you might expect it sell for slightly less in reality (the Spanish banks buy it). However is Spain borrows say £100 for 2 years at 6% it HAS to make more 6% profit in those 2 years to be able to repay the £100 and still make a profit. If I borrow £100 at 6% and make 20% profit it's no problem - I repay the £106 and keep £14 profit and tyvm can I do it again? Spanish 10 year bonds are above 7.5% now so that is why 2 year paper is trading nearer 6.7%. The confidence is gone and Spain certainly will need either a 'bailout' (which is more delaying tactics) or a direct ECB intervention.

Personaly I would put the lot on trial for fraud and have rid of the euro and would be dictators in Brussels with it. Long live freedom (except for the Romans who must die!).

[gaelic cowboy]

You are mistaken when you say that the Target2 repayments have been made. It was being repayed when all was hunky dory but that is precisely what is indicated by the phrase 'Target2 exposure'; it has not been payed. It is an 'asset' should it be repayed but for any chance of that the system has be kept going, which of course requires ever more money. Seriously how can Greece make Target2 payments to the ECB when it relies on ECB/IMF drip feed anyway? I know that the 'troika' loans to Greece enjoy 'seniority' to other bond holders but wouldn't it be a little self defeating to have German exports to Greece (which is actualy relatively small) propped up 'troika' loans? If it was all tickety-boo and the 700bn euros had "already" been repayed then I agree it wouldn't be a problem. It hasn't though and thus it's an "exposure".

You wont send on your goods to a customer unless you recieve payment for them so therefore the high current account surplus is what accounts for the target 2 increases. Target 2 is not a borrowing facility it's a payment facility for money that already exists the situation with Greece barely comes into it.

A Greek farmer want a new tractor so he gets a loan from his bank and buys a nice new Deutz-Fahr, the Bank of Greece is informed by the greek farmers bank to pay the german bank of the Same Deutz Fahr corporation for a tractor. As a result the Bank of Greece account is debited and the Bundesbank is credited now the Bundesbank will finally credit the local bank in Germany of Same Deutz Fahr who made the tractor. The only time collateral comes into the equation is with regard to the loan made by the Greek bank to the Greek farmer as whatever collateral used is liable for the loan on the Greek side. However the Germans have already been paid for the tractor so they dont care if the loan goes bust.

Now of course this local Greek bank might have been given capital by the EFSF to ensure a banking system in Greece so potentially this tractor was bought with money from the EFSF. However potentially Germany only contributed a share of say 20% of that loan but Germany gets 100% of the payment for the tractor. The kicker is that germany can now sit back and wait for it's 20% plus interest on the EFSF loan while essentially having staked nothing because it probably sold a bond at practically negative rates for it's EFSF contribution. Essentially Germany has already been paid for it's loan through the payments injected into it's domestic economy and bond market.

Now if Greece somehow could pull the plug on Euro membership and it's not clear how this could occur this could mean the colateral put up by the Greek farmer for his tractor is now worth less that the value of the loan. As a result the ECB may require all member states to pay for the shortfall as per there share of the overall ECB (if there stopped from printing money to pay the loan)

You only have to pay for the amount of the ECB that you own so German would end with a surplus after it pays out and Greece could potentially wipe 95% of it's target 2 out in one go. This means any countries with small imbalances gain little to nothing or potentially could even lose out if there ECB share is larger than the target 2 amounts they have.

If Greece leaves and somehow the ECB is blocked from printing the Euro it needs to cover any payments then massively imbalanced target 2 is a good thing.


Now I know your thinking surely the money cannot be just appear magically even if it can be printed by the ECB just remeber the plus side of the equation is naturally tracked by a nice big minus due to the deflation in the Greek economy. This balances the equation and essentially it can go on for as long as people continue to pay Germany to lose a small bit of there of there money for fear of losing it all.

Eventually people will tire of poor returns on German bonds and thats where the real trouble starts as it's now much harder to prop up intra-european trade with Germany.

In theory if Greece (for example) left the euro Germany would be able reclaim it's Target2 money from the ECB. "Consider an example for Germany and Greece. Germany provided about 27 percent of the capital of the ECB provided by countries belonging to the euro area (Bank of Spain 2012). Greece's TARGET2 balances are on the order of 100 billion euro. If something happened and those balances became worth half, losses would be 50 billion euro and Germany's exposure 27 percent of that, or on the order of 13 billion euro, a far cry from what might be suggested by its TARGET2 balance of approximately 500 billion euro. Furthermore, Germany's TARGET2 balance itself could be zero and the loss would be the same in this example. It is the net exposure of the ECB to countries that determines any risk associated with TARGET2." (Gerald Dwyer)

The exposure refers to a current account surplus ie Germany imports less goods and capital into it's economy than it sends out. This is because Germany is are essentially paid for these things by everyone else, now it's also important to remember that that your target 2 can be out of balance within Europe but overall your economy could be running a current account surplus.

Here we could say Ireland imports more from Europe than it exports however this is paid for many multiples of times by exports to non-eurozone countries. Essentially Ireland's only problem would then be a government deficit brought on by a reduction in GDP due to a banking sector crash.

So if Ireland left the Euro it's not neccessarily so that people would not get there target 2 money back although they might not get there EFSF money back.

In a way you are right; the ECB suffers, not Germany but as most of the loans handed out by the ECB and therefore debts owed to the ECB are German money... See my point?

Because the ECB can print Euro it doesnt need any German money so the ECB is not in debt to anyone, however troika loans require actual money from a contributing country to fund an EFSF loan and that is a debt. Money owed to the ECB is separate to the EFSF but your right money owed to the ECB would be a debt however it cannot go broke as it can print Euro. This printing of money has no bearing on inflation because Europes economy is actually in a deflationary spiral. Essentially the only thing to worry about in this senario would be the Euro's strength vs currency X with regard to sourcing imports for the larger European economy.

Recently actual auctions of both Spanish and Italian bonds have been slightly under the market trading price. I believe the last 10 Italian auction was arounf 5.4% but don't recall offhand whereas it's quoted nearer 6%. So although Spanish 2 year paper is trading for 6.7% you might expect it sell for slightly less in reality (the Spanish banks buy it). However is Spain borrows say £100 for 2 years at 6% it HAS to make more 6% profit in those 2 years to be able to repay the £100 and still make a profit. If I borrow £100 at 6% and make 20% profit it's no problem - I repay the £106 and keep £14 profit and tyvm can I do it again? Spanish 10 year bonds are above 7.5% now so that is why 2 year paper is trading nearer 6.7%. The confidence is gone and Spain certainly will need either a 'bailout' (which is more delaying tactics) or a direct ECB intervention.

But if Spain grows at say 3.5% over 2 yr it could outstrip the 7% required to pay it back by a couple of percent, remember it's 3.5% on top of the figure for this yr and then 3.5% on top of next yrs now bigger number. So if the amount borrowed was as a percent of GDP less than the growth rate over a two yr period then the figure could I believe add up overall.

Of course I dont believe that Spain can sustain a prolonged 7% anymore than Greece could so in the words of South Park

Personaly I would put the lot on trial for fraud and have rid of the euro and would be dictators in Brussels with it. Long live freedom (except for the Romans who must die!).

They will stand on top of a nuked Europe before they admit they were wrong..

[SoFarSoGood]

You only have to pay for the amount of the ECB that you own

Correct.

Now of course this local Greek bank might have been given capital by the EFSF

The Ponzi scheme they are running yes...

Now if Greece somehow could pull the plug on Euro membership and it's not clear how this could occur this could mean the colateral put up by the Greek farmer for his tractor is now worth less that the value of the loan. As a result the ECB may require all member states to pay for the shortfall as per there share of the overall ECB (if there stopped from printing money to pay the loan)

Ahahh we agree? (I am well aware that there is no 'legal' exit from the straightjacket).

You only have to pay for the amount of the ECB that you own so German would end with a surplus

Nope because, as you explain: "the colateral put up by the Greek farmer for his tractor is now worth less that the value of the loan". The others then stump up to cover the loss as as % of funds in the ECB (in the ideal world). Of course realistically asking Spain and Italy to pay more to cover someone elses 'tractors' will only cause a worse problem for them.

Because the ECB can print Euro

It can't 'print the money' by it's rules, nor can it lend directly to Governments. That was what the LTRO was about: Trying to fund the banks so that they could purchase the sovereign debt. It worked (for a while).

Look my friend as you most correctly explain the value of the tractor 'loan' diminishes should Greece devalue and return to the Drachma; indeed all Greek Target2 debt devalues. The ECB then "may require all member states to pay for the shortfall as per there share of the overall ECB". You want to ask Spain? Might not be wise right now...

So yes the ECB loses but so do the contributors to the ECB proportionaly (as you say). Ergo who loses most? Germany.

[phonicsmonkey]

Thought you chaps might enjoy this

[gaelic cowboy]

Nope because, as you explain: "the colateral put up by the Greek farmer for his tractor is now worth less that the value of the loan". The others then stump up to cover the loss as as % of funds in the ECB (in the ideal world). Of course realistically asking Spain and Italy to pay more to cover someone elses 'tractors' will only cause a worse problem for them.

The loss is born by the Bank of Greece and the local bank as thats where the loan is, lets remeber this fictional tractor has already been bought and paid for so the Germans are actually in the clear. It's the ECB and the Bank of Greece that have to worry about the credit worthiness of the loan basically I have yet to see someone who sold a house ending up with less because the guy they sold it to is in negative equity.

The only time where everyone has to stump up is if someone leaves the Euro.

It can't 'print the money' by it's rules, nor can it lend directly to Governments. That was what the LTRO was about: Trying to fund the banks so that they could purchase the sovereign debt. It worked (for a while).

This wouldnt be lending to governments it would be lending effectively to national central banks which essentially are the ECB through the various board members. So unless said printing is blocked by a vote at ECB board level I dont see how the ECB could go broke.

Look my friend as you most correctly explain the value of the tractor 'loan' diminishes should Greece devalue and return to the Drachma; indeed all Greek Target2 debt devalues. The ECB then "may require all member states to pay for the shortfall as per there share of the overall ECB". You want to ask Spain? Might not be wise right now...

Indeed which is why nobody will either be forced or choose to leave in fact.

So yes the ECB loses but so do the contributors to the ECB proportionaly (as you say). Ergo who loses most? Germany.

How can Germany lose though your original assertion was that Germany is OWED money when in fact they have really been paid. The only thing they have to worry about at all is that no one leaves and if they do there target 2 is larger than there share. Now this essentially means Germany must have a contiually weak Euro to ensure continued trade with EZ economies, naturally this kills the other economies through deflation requiring bailouts.

This essentially is a ponzi that eventually has to end but it's not clear that German politicians have woken up to that fact or that they have adequetaly explained it to there voters. Essentially all those pension funds and financial products that chased returns all over the EZ will eventually have to face the loss.

Otherwise they will sink there own currency

[gaelic cowboy]

Former Anglo chief Seán FitzPatrick charged with 16 offences as part of fraud investigation

About time this is the that effectively casued Ireland to need a bailout.





Relentless market pressure pushes Spain closer to bailout

And in other news that pesky market just wont leave Spain of the Euro alone oh dear all I can think to say in reply is Timber



looks like another full bog standard sovereign bailout