Circular economics

 

“The problem isn’t France, its Greece.” – a Swiss banker

Its interesting how the blame game gets played out all over Europe. The Swiss blame the French banking problem on Greece’s inability to service its debt in an appropriate manner, the Greeks blame the IMF for imposing austerity so that they can’t repay their debts, the Greek people are also pissed because the Greek bailout money didn’t hit the real sector, but went straight to the indebted Greek banks, so that they may by more of their own sovereign debt and so on and so forth.

The French banking sector is going to have a capital impairment issue if they continue to saddle up on Greek, Spanish, Italian and other dubious debts. But, in the banker world, buying trash is an excellent way to make money. They can:

1. Buy Spanish, Italian, Greek debt with money loaned to them from the ECB at dirt cheap manipulated interest rates – for 3 years (LTRO I & II). Making a spread of the 100 basis points to the ECB and 700 basis points on Spanish debt.

2. They can after obtaining these funds, buy the debt, and if,  either according to local regulatory rules or banking capital rules, dispose of some of this debt by collateralizing it at the ECB, at par, and getting even more excess reserves that they then gamble with in the derivatives market.

3. Get the funds from the ECB at 0,25% and directly park it back at the ECB for 1%. A spike in this liquidity category, that happens frequently during this crisis is a sign of immense supply (shadow inflation) and demand imbalance in the loan market.

The ring-around-the-rosy continues.