[Russ Winter]

When you hear talk about expanding the European LTRO funding, is is important to go straight to the mechanics of the exercise, and then ask what does the new round of exposure mean to the ECB.   The LTRO is a repo transaction where the ECB takes in collateral in order to back any loans.  The ECB will swap cash in exchange for questionable assets so that insolvent banks can replace funding caused by defacto bank runs. If they choose they can then double down on sovereign bets, or pay off creditors. Italian banks in particular are so exposed to their own sovereign debt that they may have decided to gamble away, figuring they are dead anyway.  Might as well take the ECB with them.  But we need to constantly ask ourselves what is the risk to the ECB itself, and by extension Germany, France, Italy and Spain, who are the principal sponsors of the ECB.   What happens when the banks evaporate in the next debt hiccup and the ECB needs to seize the collateral.

This article at FT Alphaville by Joseph Cotterill provides the gory details.  It appears the LTRO has mostly been about a cozy arrangement with French banks, and to a lesser extent Italian banks.   The ECB quietly exploded the list of collateral it would accept by more than a third at the start of the year. Almost all the 10,599 debt instruments it added were from banks – and more than 8,000 of them from French banks. The ECB is going about accepting unlisted bank bonds — i.e., bonds that the banks could have issued purely to themselves solely in order to pledge them as collateral for central bank funding.  They carry no prospectus, etc. If the ECB model  we-take-no-losses-in-defaults model holds true, then other bank bondholders will be further subordinated down the capital structure.

Wonderful, the ECB can secure its lending to these already hyper-leveraged exposed banks, with flaky bonds issued by the same cast of characters. How is that going to work in a pitch?  Oh we already are in a pinch. It is obvious that Europe is now “all in” and fully prepared to go down with their bankster cronies.



Separately it seems French voters, as elsewhere, have bailout fatigue, and as a result look set to elect Socialist Francois Hollande over Sarkozy. In a second runoff Hollande wins 60-40. Hollande is about less austerity, and talks of an increased role for the European Central Bank “to put it to the service of real economy,” the creation of euro bonds and the use of receipts from a European financial-transaction tax to erect a stronger firewall to prevent debt-crisis contagion in the euro area. There is also mentioned of the creation of European “project bonds” to fund big industrial projects.  To me this just translates into dividing the spoils into the hand of a different set of kleptocrats.  As far as the financial sector goes however, Hollande sounds tough, very tough. Inspiring for the gente for sure, but just like with the new prime minister, Enda Kenny in Ireland,  once in office,  the banksters will bring by the dynamite strapped books to try and scare the crap of him.

WSJ:

Mr. Hollande, who recently called the world of finance his “main foe,” vowed Thursday to “separate the speculative sector from the credit sector,” as he detailed 60 proposals for his platform ahead of the spring presidential election. ”The world of finance has gone out of control,” Mr. Hollande said. “This has disrupted markets, created a premium for speculation, and discouraged investment—causing damages on the real, day-to-day, economy.”

  

















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