Last week I penned Sophisticated Ignorance Part 2: Pressuring Germany To Do The Wrong Thing Is A Short Seller's Dream, wherein I continued the argument that serial bailouts of banks whose assets dwarf domicile GDPs has never, ever worked. Part and parcel to said argument was Germany's resistance to such profligate spending and the perception that Germany was somehow immune to the economic maladies that afflicted its European trading partners - reference The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You... An astute reader commented on these postings as follows:
Reggie, all well argued, but the scramble for German Bunds is still on and even if it were to stop there won't be many who sell. (or COULD sell). Even if, you have the ECB who could easily buy up German bunds as well and keep rates down. At the end of the day it's a complete fiasco, no doubt, but that day could last a lot longer than you (or me) currently assume...
I have broached the argument in the past that the ECB is not god, or even close to it, and that it can only play the bond buying ponzi for but so long before negative consequences occur. Reference:
- Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!
How much damage is being inflicted upon the ECB, and how? Well simply read How Greece Killed Its Own Banks! and remember that this article was written in the beginning of 2010, when the bonds were trading for much more then they were right before they defaulted! then reference Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!
The ECB's balance sheet bloat doesn't begin or end with Greece. I excerpt "The Bull Argument For Europe Is Credible, Except For The Circular Argument: You Can't Solve Debt Problems With More Debt!!!" as follows:
Italy has close to a quarter trillion euros of bonds maturing around now and another $352 bln maturing next year. The market has already soured on Italy's need to raise so much capital and has punished it through rate increases. The ECB already holds an estimated 20% of Greek, Portugal and Irish outstanding bonds yet it has jumped on the Italian bond buying bandwagon as well. It is doubtful that it has the political will to do the same for Italy and Spain, and even if it did it may not have the financial will to politically monetize the guaranteed losses it will endure. Just take a look at the losses it took on Greek bonds last year, before they really tanked...
The same hypothetical leveraged positions expressed as a percentage gain or loss…
One should doubt that the new EFSF is likely to be large enough to rescue all of insolvent Europe without the necessary debt destruction taking place.
Hopefully, by now, I have presented enough to get the message across. The question is, whom have I gotten the message across to? Again, evidence that BoomBustBlog should be one of your first reads, ahead of the MSM and the sell side, significantly ahead! Last week, CNBC ran this article - Time Bomb? Banks Pressured to Buy Government Debt Thursday, 31 May 2012 | 2:42 PM ET
US and European regulators are essentially forcing banks to buy up their own government's debt—a move that could end up making
the debt crisis even worse, a Citigroup analysis says. Regulators are allowing banks to escape counting their country's debt against
capital requirements and loosening other rules to create a steady market for government bonds, the study says.
While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to
make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.
"Captive bank demand can buy time and can help keep domestic yields low," Lorenzen wrote in an analysis for clients. "However,
the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn't used very prudently."
"Specifically," Lorenzen adds, "having banks loaded up with domestic sovereign debt will only increase the domestic fallout if the
sovereign ultimately reneges on its obligations."
The banks, though, are caught in a "great repression" trap from which they cannot escape.
"When subjected to the mix of carrot and stick by policymakers...then everything else equal, we believe banks will keep buying,"
Institutions both in the U.S. and abroad have been busy buying up their national sovereign debt for years, he found.
Spanish banks bought 90 billion euros worth while Italian firms picked up 86 billion euros just between November and March. Even
in the UK, which has avoided a debt crisis as it is outside the euro zone and able to set its own monetary policy, banks have increased
holdings of gilts by 100 billion pounds over the past few years.
And in the U.S., banks, though having "comparatively low holdings" of Treasurys, have bought $700 billion of American debt since 2008.
"Ask the simple question: Why are banks buying sovereign debt when yields are either near record lows, or perhaps more interestingly,
when foreign investors are pulling out?" Lorenzen wrote.
It's really enough to make you say, "Hmmmm!!!" While I have illustrated, in explicit detail, the danger to the banks due to this "kick the can
down the road syndrome" (subscribers, see the 141 items in the Banks & Financial Services downloads section) The truly underappreciated
risk is in the insurance sector, as illusrated in the "The Biggest Threat" post.
I'm actually in the process of building a staggered put portfolio on this company, among others covered in my research notes, right now. I will
post on why I chose what I chose to represent my bearish position on this company in a future post, likely sometime this week if time permits.