Time Bomb? Banks Forced to Buy Government Debt - Politics Forum.org | PoFo

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#13974383
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."
http://www.cnbc.com/id/47633576


There you have it. America is headed towards another crisis. Evil Empire is collapsing.
#13974395
There you have it. America is headed towards another crisis. Evil Empire is collapsing.


How many years have you been sying this now?

Where are the wheel barrows full of dollars you said were coming due to hyperinflation?

America's decline must be an ultra-slow motion collapse...
#13974836
I understand where the carrot is but I'm not seeing any evidence of a stick, at all.

It is ironic though, that we regulate to try and keep the banks from taking unacceptable risks, and then have to loosen the regulations in order for them to buy government debt. It says something about where things are headed if government debt counts as an unacceptable risk.
#13974839
Blue Puppy wrote:I understand where the carrot is but I'm not seeing any evidence of a stick, at all.

It is ironic though, that we regulate to try and keep the banks from taking unacceptable risks, and then have to loosen the regulations in order for them to buy government debt. It says something about where things are headed if government debt counts as an unacceptable risk.


Things are headed to capitalism's inevitable collapse. Cm'on, y'all didn't actually expect it to be sustainable, right? :D
#13974840
There is a long history of bank regulation used to benefit government's coffers.

And yes, it is a sad state of affairs. And this is just one more problem with governments - unlike private companies, governments tend to take the entire society down with them.
#13974841
"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."

If they know what's good for them, they'll be very careful what they do. We aren't ready for total collapse yet.
#13974874
Blue Puppy wrote:I understand where the carrot is but I'm not seeing any evidence of a stick, at all.


Back room negotiations.

Treasuries are sold so countries can spend more. If banks are willing to buy debt at such low interest, someone must be pressuring them to hand their money over to government in exchange for something else.

Otherwise, they'd lend to the general public or invest on their own. The capital requirements excuse is just an aside.

Anyway, the "carrot and stick" approach is the problem itself. It implies that banks are animals that can't think for themselves.
#13975149
KlassWar wrote:Things are headed to capitalism's inevitable collapse. Cm'on, y'all didn't actually expect it to be sustainable, right? :D


I disagree. Capitalism is simply restructuring as a radically global system and Western affluence is taking a huge hit as a result. However, just about every piecemeal reform the workers' movement has fought for over the course of multiple generations is being eroded in a span of just a few short years, which is a strong indication that the myth of liberal progress - rather than capitalism itself - is collapsing before our eyes.
#13975174
Capitalism is simply restructuring as a radically global system and Western affluence is taking a huge hit as a result.

Precisely.

However, just about every piecemeal reform the workers' movement has fought for over the course of multiple generations is being eroded in a span of just a few short years, which is a strong indication that the myth of liberal progress - rather than capitalism itself - is collapsing before our eyes.

And this is why reformism is doomed - any concessions made to the working class by the bourgeoisie can be reversed at any time. As Lenin put it, the ultimate question in any system is "who whom?" - who has the power to do what to whom? In other words, what matters are the power relations in society. If those power relations remain unchanged, then no amount of reform is going to make any difference in the long run. I would also add that globalisation has effectively detached the bourgeoisie from the proletariat of their home country. Their property and physical safety no longer depend on keeping the working class of their home nation appeased. If things get too hot for them at home, they can simply up sticks and relocate to Kuala Lumpur or Guatemala or wherever, where any union stewards who start getting uppity can just be 'disappeared'.
#13984880
Which is a big improvement from just getting "disappeared" by your local union stewards in my opinion.

I can't see why people complain if those that they feel are politcally holding them back, leave the country.
Except out of malice.

Like it's not enough for me to run you out of your home, you have to stay there and suffer so that I can have someone to stick pins in or slave labour for me.

When it's time tio start defending my life and property on a routine basis because I can't find common ground with my local populace, I'm going to leave.
I'm not going to go on a rampage of murder. I'm not going to just lay down and die.
I'm just going to leave.
Let the idiots live in the stink of their own making.
#13988128
KlassWar wrote:Things are headed to capitalism's inevitable collapse. Cm'on, y'all didn't actually expect it to be sustainable, right?


Do you actually believe what the US has as an economic system is capitalism? Any system that has the government forcing banks to buy debt is by definition not a capitalist system. America has been sliding towards a fascist economy for decades now, or if you prefer, corporatism, socialism, national socialism, public-private partnership, or crony capitalism. That's been one of the progressive's best tricks for years now, blaming disasters caused by government control of the economy on "capitalism". The housing collapse and economic crisis of the last several years are just the latest two examples. Would the housing market have collapsed like it did if the Community Re-investment Act and Fanny/Freddie hadn't been distorting the market? Would huge companies like Goldman Sachs and others have risked as much investor money on subprime mortgages if they didn't know that they had "invested" enough in Barack Obama's campaign that any losses would be covered by taxpayer money? The whole "too big to fail" meme should be replaced by "donated too much to my campaign to fail".
#13988204
Russkie wrote: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."
http://www.cnbc.com/id/47633576




There you have it. America is headed towards another crisis. Evil Empire is collapsing.



governments don't force banks to do much, rather the other way around

it is a waste of breath to mention that borrowed money becomes worthless if it isn't invested prudently. duh.

the problem is that there are few ways to squeeze more productivity out of the earth. We are already over-exploiting every resource...the problem is that too many of us are doing too much at the same time. unless there is a new technology in the production of clean water, food, or energy...we are going to have to suddenly deal with less Less and LESS of all those things

Of course we here in the first world already understand this unacceptable bargain as a way of life - it is why our way of life has been what it has since the 1960's. Basically, necessity is the mother of invention. Either the necessity of the human race to exploit more food, water, and energy is met...or some other value in the equation will bust - probably population size. Since this has been known and foreseen since the 1960's at least...if not updated every year...what are any of you worrying about? You are either slated for death or you are not...it is too late to change your status.
#13988206
governments don't force banks to do much, rather the other way around

Both ways, actually. We have a symbiotic relation in which it is impossible to coherently isolate only one causal direction.

it is a waste of breath to mention that borrowed money becomes worthless if it isn't invested prudently. duh.

Not if you are "rescued".
#14450814
Nattering Nabob wrote:How many years have you been sying this now?

Where are the wheel barrows full of dollars you said were coming due to hyperinflation?

America's decline must be an ultra-slow motion collapse...


I can explain how people such as him are both right and wrong.

The US is able to create so much debt because it exports its inflation. In other words the money that we spend as credit is given value by the goods that are demanded in USD markets.

USDs are required to buy oil from OPEC and other Pacific and South American oil centers. Countries that take loans from the IMF and World Bank are required to acquire dollars to make payments. These two things (the petrodollar and USD debt markets) are the phenomena that give rise to things like the "eurodollar" and link together USD demand in international markets to various countries energy expenditures, which is to say that it is intimately linked with the economies. Eurodollars are dollars that are held in any non US bank and used primarily to capitalize loans (currency creation) in other currencies around the world. This is why the USD is considered so "liquid." Everyone uses USDs to collateralize their own currencies.

So when the hyperinflationists (I consider them alarmists) claim that one day all of those USDs being used in petrodollar, debt, and foreign currency markets comes back it will create tremendous inflation commensurate with the amount of total outstanding debt obligations. This is true.

However, the rest of the world would also be badly damaged from an immediate "switch" to a hypothetical competitor to the USD. I mean, the world would be in tatters, everywhere; because the amount of USDs that are out there playing roles in all of the things i mentioned is absolutely crazy - tens of trillions of dollars, many years of total GDP on a good year. So, my guess is that BRICS will likely attempt to use their USD assets (foreign exchange reserves in the literature) to participate in a scheme of their own in developing nations that do not currently use the IMF and other Western USD based financial support institutions.

So, they are right, one day the world is going to lose confidence and necessity in dealing with the US because it spends way too much money, but it will be a slow drift over many years and the central banks of the world have constantly signaled that they would cooperate in this endeavor. You'll know its bad when import costs (cell phones, computers, etc.) rise, but it is a problem that is at least a decade and another financial crisis away from getting to a point where the world is, of necessity, putting together something new.
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