Category Archives: Spain

Frozen Europe Means ECB Must Resort to ELA

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They have become resigned to the idea that the ECB must write the check for the banking system as do all currency issuers directly or indirectly as previously discussed.

And they now also know the ECB is writing the check for the whole shooting match directly or indirectly also as previously discussed.

With deficits as high as they are and bank and government liquidity sort of there, the euro economy can now muddle through with flattish growth and a large output gap. Ok for stocks and bonds and not so good for people.

Next the action moves to moral hazard risk in an attempt to keep fiscal policies tight without market discipline.

But that’s for another day as first the work on an acceptable framing of the full ECB support they’ve backed into.

Frozen Europe Means ECB Must Resort to ELA

By Dara Doyle and Jeff Black

May 25 (Bloomberg) — The first rule of ELA is you don’t talk about ELA.

The European Central Bank is trying to limit the flow of information about so-called Emergency Liquidity Assistance, which is increasingly being tapped by distressed euro-region financial institutions as the debt crisis worsens. Focus on the program intensified last week after it emerged that the ECB moved some Greek banks out of its regular refinancing operations and onto ELA until they are sufficiently capitalized.

European stocks fell and the euro weakened to a four-month low as investors sought clarity on how the Greek financial system would be kept alive. The episode highlights the ECB’s dilemma as it tries to save banks without taking too much risk onto its own balance sheet. While policy makers argue that secrecy is needed around ELA to prevent panic, the risk is that markets jump to the worst conclusion anyway.

“The lack of transparency is a double-edged sword,” said David Owen, chief European economist at Jefferies Securities International in London. “On the one hand, it increases uncertainty, but at the same time we do not necessarily want to know how bad things are as it can add fuel to the fire.”

Under ELA, the 17 national central banks in the euro area are able to provide emergency liquidity to banks that can’t put up collateral acceptable to the ECB. The risk is borne by the central bank in question, ensuring any losses stay within the country concerned and aren’t shared across all euro members, known as the euro system.

ECB Approval

Each ELA loan requires the assent of the ECB’s 23-member Governing Council and carries a penalty interest rate, though the terms are never made public. Owen estimates that euro-area central banks are currently on the hook for about 150 billion euros ($189 billion) of ELA loans.

The program has been deployed in countries including Germany, Belgium, Ireland and now Greece. An ECB spokesman declined to comment on matters relating to ELA for this article.

The ECB buries information about ELA in its weekly financial statement. While it announced on April 24 that it was harmonizing the disclosure of ELA on the euro system’s balance sheet under “other claims on euro-area credit institutions,” this item contains more than just ELA. It stood at 212.5 billion euros this week, up from 184.7 billion euros three weeks ago.

The ECB has declined to divulge how much of the amount is accounted for by ELA.

Ireland’s Case

Further clues can be found in individual central banks’ balance sheets. In Ireland, home to Europe’s worst banking crisis, the central bank’s claims on euro-area credit institutions, where it now accounts for ELA, stood at 41.3 billion euros on April 27.

Greek banks tapped their central bank for 54 billion euros in January, according to its most recently published figures. That has since risen to about 100 billion euros, the Financial Times reported on May 22, without citing anyone.

Ireland’s central bank said last year it received “formal comfort” from the country’s finance minister that it wouldn’t sustain losses on collateral received from banks in return for ELA.

“If the collateral underpinning the ELA falls short, the government steps in,” said Philip Lane, head of economics at Trinity College Dublin. “Essentially, ELA represents the ECB passing the risk back to the sovereign. That could be the trigger for potential default or, in Greece’s case, potential exit.”

Greek Exit

The prospect of Greece leaving the euro region increased after parties opposed to the terms of the nation’s second international bailout dominated May 6 elections. A new vote will be held on June 17 after politicians failed to form a coalition, and European leaders are now openly discussing the possibility of Greece exiting the euro.

A Greek departure could spark a further flight of deposits from banks in other troubled euro nations, according to UBS AG economists, leaving them more reliant on funding from monetary authorities. Banks in Greece, Ireland, Italy, Portugal and Spain saw a decline of 80.6 billion euros, or 3.2 percent, in household and corporate deposits from the end of 2010 through March this year, according to ECB data.

“ELA is a symptom of the strain in the system, and Greece is the tip of the iceberg here,” Owen said. “As concerns mount about break-up, that sparks deposit flight. Suddenly we’re talking about 350 billion, 400 billion as bigger countries avail of ELA.”

German ELA

ELA emerged as part of the euro system’s furniture in 2008, when the global financial crisis led to the bailouts of German property lender Hypo-Real Estate AG and Belgian banking group Dexia. While the Bundesbank’s ELA facility has now been closed, Dexia Chief Executive Officer Pierre Mariani told the bank’s shareholders on May 9 that it continues to access around 12 billion euros of ELA funds.

ELA was a measure that gave central banks more flexibility to keep their banks afloat in situations of short-term stress, said Juergen Michels, chief euro-area economist at Citigroup Global Markets in London.

“It seems to be now a more permanent feature in the periphery countries,” Michels said, adding there’s a risk that “the ECB loses control to some extent over what’s going on.”

The ECB was forced to confirm on May 17 it had moved some Greek banks onto ELA after the news leaked out, roiling financial markets. The ECB said in an e-mail that as soon as the banks are recapitalized, which it expected to happen “soon,” they will regain access to its refinancing operations. The ECB “continues to support Greek banks,” it added.

‘Life Support’

By approving ELA requests, the ECB is ensuring that banks that would otherwise not qualify for its loans have access to liquidity.

“The ELA is a perfect life-support system, but it’s not a system for what happens after that,” said Lorcan Roche Kelly, chief Europe strategist at Trend Macrolytics LLC in Clare, Ireland. “What you need is a bank resolution mechanism, a method to get rid of a bank that’s insolvent. In Ireland, and perhaps in Greece as well, the problem is that you’ve got banking systems that are insolvent.”

For Citigroup chief economist Willem Buiter, there is a bigger issue at stake. ELA breaks a key rule that is designed to bind the monetary union together, he said.

“It constitutes a breach of the principle of one monetary, credit and liquidity policy on uniform terms and conditions for the whole euro system. The existence of ELA undermines the monetary union.”

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Trichet proposal

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Not much of a plan, but note that it now makes ECB centric proposals respectable.

This is serious progress:

Ex-ECB Chief Trichet Unveils Bold Plan to Save Euro

May 17 (Reuters) — Europe could strengthen its monetary union by giving European politicians the power to declare a sovereign state bankrupt and take over its fiscal policy, the former head of the European Central Bank said on Thursday in unveiling a bold proposal to salvage the euro.

The plan offered by Jean-Claude Trichet, who stepped down last November as ECB president, would address a fundamental weakness of the 13-year-old single currency, the survival of which is threatened by the Greek crisis.

The monetary union has always defied economic principles, because the euro was launched ahead of European fiscal or political union. This has caused strains for countries running huge budget deficits – namely Greece, Portugal, Ireland, Spain and Italy – that have led to financing difficulties and over-stretched banking systems.

For the European Union, a fully fledged United States of Europe where nation states cede a large chunk of fiscal authority to the federal government appears politically unpalatable, Trichet said.

An alternative is to activate the EU federal powers only in exceptional circumstances when a country’s budgetary policies threaten the broader monetary union, he said.

“Federation by exception seems to me not only necessary to make sure we have a solid Economic and Monetary Union, but it might also fit with the very nature of Europe in the long run. I don’t think we will have a big (centralized) EU budget,” Trichet said in a speech before the Peterson Institute of International Economics here.

“It is a quantum leap of governance, which I trust is necessary for the next step of European integration,” he said.

His proposal was presented in Washington on the eve of the G8 meeting of the world’s major economies, hosted by U.S. President Barack Obama who will press Europe to intensify its efforts to resolve the sovereign debt crisis, which threatens a fragile global recovery.

It also comes ahead of a critical meeting of EU leaders on May 23 to discuss ways to support growth. Its strict budgetary policies to date have led to recessions in many countries, political unrest and in Greece a political stalemate after recent elections.

Trichet said the building blocks already are in place for moving ahead with his fiscal plan.

Countries have agreed to surveillance of each other’s budgets and they have agreed to levy fines on countries that run excessive budget deficits, giving them fiscal oversight authority.

The next step would be to take a country into receivership when its political leaders or its parliament cannot implement sound budgetary policies approved by the EU. The action would have democratic accountability if it were approved by the European Council of EU heads of states and the elected European Parliament, he said.

The idea earned a warm reception from leading economists and prominent Europeans attending the session.

“It is a very radical proposal, couched as a modest step,” said Richard Cooper, international economist at Harvard.

Caio Koch Weser, former German economics minister, said he found it “very attractive” because it addresses the problem of a strong European Central Bank, a weak European Commission which acts as the EU’s executive branch, and a confused European Council, which provides political leadership.

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Quick update

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US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.

Lower crude prices should also help some.

I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.

But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.

So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.

But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.

It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.

Not to mention possible dislocations from the whale, which may or may not have run their course, etc.

And then there’s the news from Greece.

First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.

Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.

It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.

And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.

As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.

And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.

For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.

The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?

Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.

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Hollande faces budget shortfall test

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Not even a passing mainstream thought to look at currency users like France, Spain, Italy, California, and Illinois, that are facing severe market discipline via solvency/interest rate risk any differently from currency issuers like the UK, US, Japan, and Denmark where those types of market forces remain stubbornly inapplicable.

One would think something so obvious and ‘in their face’ year after year, decade after decade, might get their attention…

Hollande faces budget shortfall test

(FT) François Hollande has promised that he would take whatever measures necessary to rein in France’s heavy public debt, which is rising close to 90 per cent of gross domestic product. He knows that to win backing for his growth initiative from German chancellor Angela Merkel depends on assuring her that France will meet its obligations on its own public finances. The European Commission’s forecast projected a budget deficit next year of 4.2 per cent, compared to the target of 3 per cent set by Brussels and to which Mr Hollande is committed. That amounts to a gap of some €24bn. Mr Hollande is unlikely to give further details of his plans until he gets an independent report on the public finances at the end of June (after National Assembly elections).

Dutch austerity consensus unravels

(FT) Freedom party leader Geert Wilders brought down the country’s ruling coalition last month when he pulled out of talks over budget cuts needed to meet strict EU deficit limits, triggering elections scheduled for September 12. Mr Wilders is campaigning fiercely against what he calls the government’s “subservience” to Brussels’ demands for budget cuts. A poll released on Monday suggests voters are turning against the last-minute budget deal reached after the government fell between the ruling liberals and centre-left opposition parties. The April 26 deal pledged the Netherlands to meet an EU deadline to slash its 2013 budget deficit to below 3 per cent of gross domestic product, down from a projected 4.7 per cent.

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Spain’s Valencia Struggles To Repay Debt

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Note how ‘currency users’ are limited to relatively low levels of debt by markets:

Valencia’s total outstanding debt at the end of 2011 was EUR20.76 billion, equal to around 20% of its GDP.

Spain ran up it’s current national debt as a currency issuer when it not only didn’t matter financially with regards to funding and solvency, but it was, for all practical purposes, a requirement to accommodate non govt savings desires at desired levels of output and employment.

Spain, and the rest of the former currency issuers, then waltzed into the euro zone arrangements as currency users who all agreed to keep the same debt levels they had accumulated as currency issuers, rendering the euro arrangements ‘an accident waiting to happen’ from the get go.

Spain’s Valencia Struggles To Repay Debt

By Jonathan House and Art Patnaude

May 4 (Dow Jones) — Spain’s financially troubled Valencia region had to pay a punitive interest rate to roll over a short-term debt Friday, raising new concerns about its solvency and prompting the regional government to offer assurances it can avoid a default.

“We have covered our refinancing needs through June and we are planning on meeting our commitments,” a Valencia spokesman said.

Valencia had to offer institutional investors a 7% interest rate to roll over a EUR500 million debt for six months on Friday, a new sign of a deepening financial crisis for the regions that control over one third of spending in highly decentralized Spain. That’s more than four times what the Spain’s central government offered at its last auction of six-month treasury bills.

With a long history of overspending, Spain’s regions have moved to the center of the country’s fiscal crisis. As Prime Minister Mariano Rajoy tries to close yawning budget gaps at all levels of government and return the ailing local economy to growth, his government is scrambling to make sure the regions meet their financial obligations while reining in expenditures.

Spain had a general government budget deficit equal to 8.5% of gross domestic product in 2011, far in excess of the 6%-of-GDP target it had committed to with the European Union and international investors. Much of the overrun was the fault of the regions.

In recent months, the fiscally frail regions are facing increasing difficulty in financing themselves. International investors are steering clear. “There’s still a great deal of reluctance from institutional investors to get involved in Spain. The uncertainties are a bit too big,” said Elisabeth Afseth, fixed-income analyst at Investec Bank in London.

Valencia, on Spain’s Mediterranean coast, is one of the most troubled of its 17 regions. With its hundreds of kilometers of beachfront properties, it is ground zero for the collapse of the Spain’s housing industry, which has punched a large hole in national tax revenue and sent the economy into a long slump. The housing bust, coupled with years of high spending, has made Valencia one of the most indebted regions.

Valencia’s total outstanding debt at the end of 2011 was EUR20.76 billion, equal to around 20% of its GDP.

Late last year, Moody’s Investor Service downgraded Valencia’s credit to junk status and the central government had to advance Valencia some of its regular financing to prevent it from defaulting on a EUR123 million debt to Deutsche Bank AG (DB). In Spain, most tax revenue is collected by the central government.

Since then, Rajoy’s government, which came to power in December, has strengthened financial support for the regions and said it won’t let any default on their obligations. It set up an EUR10 billion credit facility they can draw on to refinance their debts and is offering EUR35 billion worth of loans to help them pay off debts to suppliers.

The Valencia spokesman said his region has received EUR2.69 billion from the credit facility that will allow it to meet all its debt obligations in the first half of the year. In addition, Valencia and other regions are pushing hard to get Madrid agree to guarantee their debts, which should help lower borrowing costs, he added.

Valencia has to refinance EUR4.5 billion worth of debt this year.

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Euro zone news headlines

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Typical day for euro zone news.
Slow motion train wreck continues.

Headlines:

EU Finance Ministers to Face Off Over Rules to Implement Basel Ill Standards
France’s Hollande Says He Hasn’t Had Parallel Talks With Merkel
Weidmann Says Reforms Are Best Basis for Growth, Zeit Reports
European Unemployment Rate Rises to Highest in Almost 15 Years
Euro-Region Manufacturing Contracts for a Ninth Month
German Unemployment Unexpectedly Rose in April Amid Crisis
Spain Can Finance Itself, Even If Expensive, Fekter Says

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German Manufacturing Shrinks at Fastest Pace Since 2009

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The 10th plague, as the infection spreads to the core?

The surprise is that it took so long, with austerity eroding export markets.
And note the drop in the employment index as well.

German Manufacturing Shrinks at Fastest Pace Since 2009

By Alice Baghdjian

April 23 (Reuters) — Germany’s manufacturing sector unexpectedly shrank at the fastest pace in nearly three years in April, denting hopes it can drive growth in the euro zone and casting a shadow over upbeat business sentiment surveys.

Markit’s manufacturing Purchasing Mangers Index (PMI) fell sharply to 46.3 from March’s 48.4, according to a flash estimate released on Monday, well below the 50 mark which would sign al growth in activity.

It marked the fastest rate of contraction since July 2009 in the sector, which has been hit by a decline in some exports as the debt crisis in the euro zone has choked demand from key trading partners.

Reports are that sales to southern Europe are particularly weak, so there is some evidence of troubles in the periphery (of the euro zone) spilling over to the core,” said Chris Williamson at Markit, adding that global trade was also sagging.

Germany produces exports that people want to buy when growth is good but cut back on when there are worrying signs, and that’s what we’ve got at the moment,” he said.

Germany’s export-driven economy, the largest in Europe, recovered swiftly from the 2008/09 global financial crisis, interrupted only by a 0.2 percent contraction in the final quarter of last year on weak exports and private consumption.

Many economists now believe this to be just a hiccup and that Germany will avoid a recession, generally defined as two consecutive quarters of contraction.

But worries about the finances of big euro zone economies such as Spain and Italy have unsettled markets in recent weeks, despite tentative signs at the beginning of the year that Europe’s more than two-year debt crisis was easing.

The manufacturing reading undershot expectations for an increase to 49.0 in a Reuters poll, with a number of indices within the survey contracting at a faster rate than in the previous month.

The PMI’s composite index, a combined measure of services and industry, fell to 50.9 from a final reading of 51.6 in March, hovering just above stagnation. Employment fell for the first time in more than two years with the employment index dipping to 49.2 from 51.7 in March.

UPBEAT SURVEYS

A companion survey, however, showed the pace of growth in the services sector increased slightly to 52.6 from 52.1 in March.

It beat the consensus forecast of 52.3 in a Reuters poll.

The German consumer has got some confidence in his spending so that’s helping the domestic economy, certainly at the moment,” Williamson said, adding further deterioration of the headline PMI figures could dent growth in the services sector.

Confidence in Europe’s bulwark economy has so far shown resilience to recent disappointing industry data.

In February, German industrial orders rose less than expected, although strong demand from non-European countries provided some momentum, and industrial output fell more than expected due to cold weather.

Last week the closely-watched ZEW index charting analyst and investor sentiment reached its highest level in nearly two years and the Ifo business climate survey inched to its highest level since July 2011, despite expectations that confidence would wane this month.

I’m surprised that (the surveys) are staying so buoyant at the moment,” Williamson said, adding that the PMI usually turns down before the confidence-based surveys.

There is an inflection point now where companies have a reasonable amount of business in their pipeline, but they are reducing that. You’ll soon see those overall indicators from Ifo start to come down again, I think it will be quite soon.”

Composite PMI input prices eased but still grew faster than output prices.

German companies say they expect challenges for the year ahead, with German car maker Volkswagen (VOWG_p.DE) bracing for a very demanding year” as the European debt crisis weighs on auto markets and global economic growth slows.

Williamson said he did not see output prices rising for some time until demand picks up.

They will compensate for that (cutting selling prices) probably through staff cost reductions, which is why we are seeing employment start to fall now,” he said.

They will simply have to fight to stay alive,” he said.

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Bad headline day for eurozone

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Euro-Area Construction Declines for Third Month Led by Germany
Bundesbank Says Euro Nations Must Set Aside Growth Concerns
Merkel Gives Spain No Respite, Says Debt Cuts Key to Yields
Germany wants IMF funding raised to $1 trillion
IMF Lowers Additional Funds Target To $400bn-Plus: Lagarde
Spain weighs financing options
Spain Reduces Flexibility of Labor Reform, Expansion Reports
Bank of Spain Questions Budget Forecasts, Calls for Prudence
Spain Is Back in Recession, Central Banker Warns
Spanish Banks to Set Aside $71 Billion for Real Estate Cleanup
IMF’s Lagarde Sees Scope for ECB Monetary Easing, FAZ Reports
IMF sees Italy missing budget deficit targets
Italy Probably Shrank 0.7% in First Quarter, Bank of Italy Says

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Spanish Law Aims To Rein in Budget

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Institutionalizing death by 1000 cuts:

Spanish Law Aims To Rein in Budget

(FT) Spain’s plan to toughen the central government’s control of regional finances passed its first legislative hurdle in a parliamentary vote Thursday. “This is a law that will serve as the foundation for policies to make Spain’s budget deficit disappear, so that Spain goes back to being a reliable European Union partner,” Budget Minister Cristóbal Montoro said after the bill passed the lower house of Parliament. The law will now go to the Senate, where it also is expected to pass. The new law will require that all levels of Spanish government have balanced budgets by 2020 and that the government lower its debt-to-GDP ratio to 60% by that year as well. The government has forecast its debt-to-GDP ratio will rise to around 80% this year.

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Spanish Banks Face Bond Losses in LTRO Aftermath: David Powell

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Looks like it was at least the Spanish banks that got the nod to buy their govt’s bonds when the LTRO was announced.

Problem is they can only buy them to the extent their capital allows, and as raising more capital isn’t happening, it was probably a one time buying binge.

That’s why subsequent LTRO’s won’t do much for banks whose capital is already fully extended.

And losses serve to weaken their capital positions.

Spanish Banks Face Bond Losses in LTRO Aftermath: David Powell

By David Powell

April 11 (Bloomberg) — The European Central Bank may have pushed the Spanish banking system closer to collapse through its three-year longer-term refinancing operations.

Banks in Spain have been saddled with losses of about 1.6 billion euros as a result of the liquidity operation conducted in December, according to Bloomberg Brief estimates. Spanish lenders purchased 45.7 billion euros of government bonds during the months of December, January and February, according to monthly data from the ECB, and the average of the current prices of two-, six- and 10-year government bonds of Spain is 3.5 percent below the average of the average of those prices from Dec. 22 to March 1. [Note: The prices for six-year bonds are used instead of those for five-year bonds because the price history for the current five-year generic government bond of Italy starts only in January.]

International assistance will probably be needed to break the cycle. Spanish sovereign yields surged last year as investors worried about the solvency of the state given unrecognized losses in the banking system linked to the real estate bubble. Interest rates later declined after Spanish lenders purchased government debt during those three months, probably with the proceeds of the first three-year longer-term refinancing operation. Those purchases are now creating additional losses for the banking system.

The losses stemming from those bonds were essentially transferred to the domestic banking system from private bondholders with the assistance of the central bank.

The damage may be mitigated by low levels of margin calls from the ECB. Deposits related to margin calls at the central bank totaled only 0.3 billion in the week ended April 4, according to the Eurosystem’s weekly financial statement.

That suggests commercial lenders posted assets as collateral that have maintained their values. Those probably consisted primarily of the “residential mortgages and loans to small and medium-sized enterprises (SMEs)”, which the central bank said were eligible for use in its Dec. 8 statement. Those illiquid assets may be unaffected by the mark-to-market process because there are no developed markets for them. The deposits related to margin calls probably would have risen if banks had posted government bonds as collateral.

The situation for financial institutions in Italy is less dire than for those in Spain. Italian government bond prices on average are 2.1 percent above the distressed levels at which they traded from Dec. 22 to March 1. That suggests Italian banks may be sitting on profits of about 425 million euros after they purchased 20.3 billion euros of government bonds during that period.

Losses for both banking systems would probably have been created if they purchased government bonds with the proceeds of the second three-year longerterm refinancing operation. The funds from the second auction are excluded from this analysis because it settled on March 1 and the latest data from the ECB on government bond purchases of euro-area banks runs through the end of February. The data for March will be released on April 30.

As Ronald Reagan quipped, “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.'”

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