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Sev
06-01-2012, 09:45 AM
If you keep rolling the dice. Eventually it comes up snake eyes.

http://www.cnbc.com/id/47633576

<span style='font-size: 23pt'>Time Bomb? Banks Pressured to Buy Government Debt</span>

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," Lorenzen said.

Institutions both in the U.S. and abroad have been busy buying up their national sovereign debt [cnbc explains] 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.

He thinks he has the answer.

For one, the European Central Bank's [cnbc explains] Long-Term Refinance Operations provided guarantees for the debt, which Lorenzen deems a "heavily sweetened form of financial repression given the pressure banks were under" to buy.

"Banks have ended up buying bonds at yields where they would happily have sold them only a few months prior," he said.

Moreover, banks are allowed to not count the sovereign debt against their Basel capital requirements. Also, Lorenzen argued, European banks have escaped the onus of stress tests this year, a less-than-subtle hint that authorities are willing to tolerate a bit of looseness in banks so long as they are helping to stave off a full-blown debt crisis.

"One doesn’t have to be too cynical to hypothesize that all the disclosures on sovereign exposure have become a bit of a political liability at a point in time where the only buyers in size of periphery sovereign debt are periphery banks funded by the ECB," he said.

"As long as funding for sovereigns in markets remains in jeopardy, and as long as there is no clear move towards proper fiscal solidarity in Europe, we reckon there will be a strong political incentive to make banks captive buyers. That implies a move away from marking sovereign debt to market, away from raising risk weights, away from capital ratios that don't risk weight assets and away from stress tests incorporating government bonds."

For investors in bank bonds, the news is good — for now.

"As long as policy remains to sustain the status quo, bondholders should come out fine. Conversely, if the burden becomes too great, then the alternative will most probably involve a radical departure from current convention — to the detriment of bondholders," Lorenzen said.

"We suspect this binary outcome requires a political judgement that many funds are not particularly well placed to make." he added. "Instead of those economics, accounting and finance degrees perhaps you should have done political science after all."

Soflasnapper
06-01-2012, 02:49 PM
This is a poorly written piece playing on confusion between the US and Eurozone situation.

The case of the article is all about Europe, and then the US situation is thrown in on top of it, with two brief sentences and nothing more.

As is fairly well known, the Fed has been out BUYING TREASURIES FROM BANKS, in the trillions of dollars amount. Twice, in QE and QE2. So what carrots and what sticks are policy makers using in the US to cause banks to buy Treasuries? This doesn't say, at all, if that is even true.

Fact is, Treasuries are in high demand all around whenever troubles kick up, as we saw today, when the 10-year bond was so in demand that the yield went down below 2% for the first time ever as the demand made the price go up.

I'm guessing you provided the 'toxic' description of this debt, as the toxic debt from before was failed mortgage backed securities, and thus a tanking derivative market, not nationally owed debt secured by national bonds.

Sev
06-01-2012, 03:03 PM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: Soflasnapper</div><div class="ubbcode-body">This is a poorly written piece playing on confusion between the US and Eurozone situation.

The case of the article is all about Europe, and then the US situation is thrown in on top of it, with two brief sentences and nothing more.

As is fairly well known, the Fed has been out BUYING TREASURIES FROM BANKS, in the trillions of dollars amount. Twice, in QE and QE2. So what carrots and what sticks are policy makers using in the US to cause banks to buy Treasuries? This doesn't say, at all, if that is even true.

Fact is, Treasuries are in high demand all around whenever troubles kick up, as we saw today, when the 10-year bond was so in demand that the yield went down below 2% for the first time ever as the demand made the price go up.

I'm guessing you provided the 'toxic' description of this debt, as the toxic debt from before was failed mortgage backed securities, and thus a tanking derivative market, not nationally owed debt secured by national bonds.

</div></div>

I agree it was poorly written.
That is correct.

If the bonds were to ever fail though. Oh boy.

cushioncrawler
06-01-2012, 06:03 PM
Me myself i reckon that there iz poorly written krappynomix and well written krappynomix.
But it iz all krappynomix anyhow.
mac.

Soflasnapper
06-01-2012, 06:52 PM
Sure, but it is far better to be stylin' when slingin' the shnit.

Appearance counts, even in krap.

Sev
06-01-2012, 07:43 PM
Fo shizzel McNizzel.

eg8r
06-01-2012, 08:11 PM
LOL, wow, this conversation went downhill quick. Mixing Snoop Dogg into a discussion on financials seems a bit far feteched. /forums/images/%%GRAEMLIN_URL%%/smile.gif

eg8r

Sev
06-02-2012, 06:50 AM
/forums/images/%%GRAEMLIN_URL%%/smile.gif /forums/images/%%GRAEMLIN_URL%%/smile.gif /forums/images/%%GRAEMLIN_URL%%/smile.gif

Soflasnapper
06-02-2012, 08:41 AM
I have now reconsidered, and although I still think the writing was poor to leave so much unexplained as to what the heck they were talking about as to the US, there is a point that I didn't catch here.

It isn't that the US is making US banks buy our own debt, or (other countries' various) sovereign debts-- it is indeed the European zone banks that are being cajoled into doing this. That part I read correctly.

But the key, which is opaquely stated at most, is that US banking authorities, meaning either or both Treasury officials and Fed officials, possibly through the IMF or joint Fed/ECB decision making, are at least agreeing to that, or perhaps pushing that policy on the ECB and Euro banks.

So the potential problem for those Euro banks if THOSE sovereign debt purchases are defaulted upon is part of some official policy here backing that strategy. Not that it's happening here, although of course with the intertwining of all banks, a default impacting over there will impact here as a combo or bank shot secondary effect.

This is an important point, as I wasn't aware we were influencing ECB policies at all (how would we?), let alone backing up this kind of tactic with our support, or maybe even authoring the policy and pushing it on the ECB (which is not clear, but it might be the back story).

I apologize for my momentary lapse of reason, related to being in an overly attacking mode. /forums/images/%%GRAEMLIN_URL%%/blush.gif

Sev
06-02-2012, 04:40 PM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: Soflasnapper</div><div class="ubbcode-body">I have now reconsidered, and although I still think the writing was poor to leave so much unexplained as to what the heck they were talking about as to the US, there is a point that I didn't catch here.

It isn't that the US is making US banks buy our own debt, or (other countries' various) sovereign debts-- it is indeed the European zone banks that are being cajoled into doing this. That part I read correctly.

But the key, which is opaquely stated at most, is that US banking authorities, meaning either or both Treasury officials and Fed officials, possibly through the IMF or joint Fed/ECB decision making, are at least agreeing to that, or perhaps pushing that policy on the ECB and Euro banks.

So the potential problem for those Euro banks if THOSE sovereign debt purchases are defaulted upon is part of some official policy here backing that strategy. Not that it's happening here, although of course with the intertwining of all banks, a default impacting over there will impact here as a combo or bank shot secondary effect.

This is an important point, as I wasn't aware we were influencing ECB policies at all (how would we?), let alone backing up this kind of tactic with our support, or maybe even authoring the policy and pushing it on the ECB (which is not clear, but it might be the back story).

I apologize for my momentary lapse of reason, related to being in an overly attacking mode. /forums/images/%%GRAEMLIN_URL%%/blush.gif

</div></div>

No problem.

I didnt realize you were attacking me. The conversation on multiple threads seems pretty tame to me.
Did I blink and miss something???? /forums/images/%%GRAEMLIN_URL%%/confused.gif

Soflasnapper
06-02-2012, 06:35 PM
No, I try not to attack people personally (don't always succeed, but I do try).

What I meant was attacking the storyline, as it made no sense to me on first reading. Should have read a bit more to understand it, but as I did not understand it, finding the references to US authorities baffling, my impression was that it was a crap piece.

On reflection, it is still true that they did not expatiate on how US authorities were involved WITH EUROPEAN BANK policies, so my reaction was not wholly untoward.

Sev
06-02-2012, 06:43 PM
Well thats good to know. I was thinking I had been attacked so many times I had become desensitized to it. /forums/images/%%GRAEMLIN_URL%%/smile.gif

Perhaps we should look to the Fed and Bilderberg Group for the answers.
Perhaps Soros as well.

There is a real danger here if the shit hits the fan across the pond. Things are dicey right now.

However the real concern is if there is something hidden out there that sends shortwaves through the system. There always seems to be something just over the horizon that is not on anybodies radar.