Greece – the catalyst on the puke in cash and CDS today was
Posted by WARREN MOSLER on December 8th, 2009
Still looks to me like it’s probably one go all go as Greece guarantees its own banks and should deposit insurance be questioned a general run on the entire euro banking system could be triggered. That could result in the close the entire payments system until it’s all reorganized with credible deposit insurance. Much like the US in 1934.
Greece – the catalyst on the puke in cash and CDS today was
was the S&P action yesterday. The ECB this year relaxed their
own rules to accept collateral to BBB- from A-. This
accomodating criteria will last until the end of 2010. If the
ECB were todecide to go back to the status quo ante in January
2011 then GGBs may not be eligible as ECB collateral (assuming
S&P follows the negative watch with a downgrade).
Greece suffering badly in cash markets (helped by low liquidty
due to a religious holiday in Italy and Spain).In 3Y, Greek bonds
are losing some 35 bp to Germany, In 10Y it’s about 28 bp.
[top]
December 8th, 2009 at 2:28 pm
In case of a “bank run” on Greece:
If the ECB doesn’t back up the Greek government with liquidity, they are risking that Greece will go bankrupt and subsequently possibly back to the Drachma.
If the ECB backs up the Greek government, they loose the imaginary “stick” that keeps the member countries from out of control spending.
Which is worse (or better)? Is there another possible way that this could play out?
Reply
December 8th, 2009 at 3:02 pm
It’s not obvious to me what might happen if there is a bank run. None of the options look attractive to the ECB or the eurozone in general
Reply
December 8th, 2009 at 3:34 pm
If a run on the Euro ensues, will the the FED open back up the swap lines and will anyone else notice?
Reply
Matt Franko Reply:
December 8th, 2009 at 5:59 pm
JC,
I believe they are still in place thru Feb. 2010. The ECB has their weekly USD operation tomorrow AM, link here for results in the AM EST.
If there is a “run” on the Euro, I’m not sure if the Fed is going to be able to help by providing USD. Trichet is going to have to earn his pay now and show leadership….Resp,
Reply
RSJ Reply:
December 9th, 2009 at 1:26 am
He is trying to earn his pay by deflating the currency :P
Reply
Jim Baird Reply:
December 9th, 2009 at 8:55 am
Isn’t that what the swap lines were there for? As a way to prevent the dollar from appreciating too much?
RSJ Reply:
December 10th, 2009 at 10:29 pm
Jim,
That’s one way of looking at it, but I think the driver was not forex, but european banks with massive short dollar positions that they could not cover, and so we bailed those banks out by supplying the dollars.
This points to the fragility of the whole eurodollar concept, as these banks do not have access to CB facilities and yet incur dollar obligations. These are all original sin type instabilities, and the whole Eurozone is engineered along this model.
December 8th, 2009 at 11:01 pm
right, it will likely be about euros this time rather than dollars,
and it will be about Greece, not the ECB.
Reply