Complete Q+A on the Greek PSI (Private Sector Involvement) plans. Barclays via zerohedge.

Another change is the need for only 12 signatories for the fiscal compact to be implemented rather than the previous 15, which has been seen as a sure-fire way to avoid referendums and/or getting it past the respective Parliaments of member states such as  in Ireland and Finland.

Reference to the “deeper integration” of the internal market are watered down which is being heralded as a ‘victory’ for Cameron by his chums. Though in reality, what this does leads the way to the UK being able  to sign up, at some time in the future, no doubt this will happen.

Article 15 has been added which states “This Treaty shall be open to accession by Member States of the European Union other than the Contracting Parties upon application that any such Member State may file with the Depositary. The Contracting parties shall approve the application by common agreement. Following such approval, the applicant Member State shall accede upon the deposit of the instruments of accession with the Depositary, who shall notify the other Contracting Parties thereof.”

Well, that probably is a victory for Cameron…

In any case the Greeks are following what the duo ‘Merkozy’ have asked demanded

“As far as the private-sector involvement is concerned, the ESM treaty should be revised to make clear that Greece required a unique and exceptional solution. We recall that all other Euro area Member States reaffirm their inflexible determination to honour fully their own individual sovereign signature. A recital in the preamble should clarify that the euro area will apply the IMF practice. As agreed, common terms of reference on CACs shall be introduced in national legislations.“

But this spells trouble for the eurozone, the periphery in particular as  Peter Tchir says “Collective Action Clauses will ensure a Credit Event, and will cause investors to pull away from sovereign debt markets as the willingness to treat certain holders preferentially and the willingness to change the laws arbitrarily are risks they aren’t getting paid sufficiently to take.“

EU policy makers: a law unto themselves.

Article 8: “Any Contracting Party which considers that another Contracting Party has failed to comply with Title III may bring the matter before the Court of Justice of the European Union. The European Commission may on behalf of Contracting Parties, bring an action for an alleged infringement Title III before the Court of Justice of the European Uniou The judgment of the Court of Justice of the European Union shall be binding on the parties in the procedure, which shall take the necessary measures to comply with the judgment within a period to be decided by said Court. The implementation of the rules put in place by the Contracting Parties to comply with Article 3(2) will be subject to the review of the national Courts of the Contracting Parties.”

Article 12: “The President of the Euro Summit shall be appointed by the euro area Heads of State or Government by simple majority at the same time the European Council elects its President and for the same term of office.”

Article 14: “…Within five years at most following the entry into force of this Treaty, cn the basis of an assessment of the experience with its implementation, an initiative shall be launched, in compliance with the provisions of the Treaty on the European Union and the Treaty on the Functioning of the European Union, with the aim of incorporating the substance of this Treaty into the legal framework of the European Union.”

EU institutions are to be at those implementing the fiscal compact’ disposal, there is to be a President of the euro-group and most important it is (planned) to be incorporated into the TEU and TFEU, affecting all member states.

To anyone and everyone who reads the blog, Merry Christmas!

It was just a little footnote to the LTRO announcement. Just a little statement that 40 billion of the collateral received by the ECB was newly issued, newly guaranteed Italian debt.  The more I think about it, the more uncomfortable I get.

The ECB claims they have 40 billion of Italian government bonds on their books from the LTRO. The banks say they pledged 40 billion of Italian government debt. The Italian government doesn’t acknowledge it as debt. Maybe it will show up in a footnote somewhere, but that is about it.

So while approving some new austerity measures that are unlikely to work, the government added 40 billion of contingent liabilities. The rating agencies can’t be happy about that. Investors shouldn’t be happy with that. Rather than being a new source of funds for Italian debt (the most optimistic view of LTRO) it created new debt!  It is adding to Italy’s debt problem.

And I can’t even figure out why they did this. Didn’t things banks have other eligible collateral? Have they already pledged anything decent they own to the ECB or private lenders to get funds?  Given the size of the balance sheets that is unbelievable but yet there is no explanation of why they didn’t have more ‘normal’ assets to pledge.

Is this just a ploy to inextricably link the Italian banks to the government. The banks could have borrowed direct from the ECB. Bizarrely enough they may have even been able to post their own non government guaranteed debt directly but that was too obviously Enronesque?

Everything about this deal makes me squirm. The LTRO seemed like a decent idea to me.  It wasn’t solving anything and was unlikely to help create new sovereign debt demand, but it would relieve funding pressure on banks. For the most part that is probably how it is being used, but this ploy by the Italians feels all wrong. It feels like a dirty game and scares me that I can’t figure out the angle behind the dirty game. Creating such a large new contingent liability for Italy seems both unnecessary and downright stupid. How will the market gain confidence in Italy and buy their debt when you don’t know how much debt is outstanding.  These banks aren’t in great shape, so the guarantees could be called on.

I think the market will grow more negative on Italy as it digests what it has done and loses faith in the technocrats.  If Italian debt slides again it will drag the market down.  This little “scam” was I’ll advised in my opinion and sadly is the sort of thing a technocrat may actually believe in. They are fans of form over substance and tend to thing of credit in vague and unrealistic ways. They like to pretend guarantees aren’t real.  They view short dated risk as, ummm, un risky – which may explain the 3 month term.

I am scared that as these contingent liabilities hit the spotlight we will find that the sovereign debt problem is far far bigger than we have realized.

“Each jurisdiction has not only its own rules, but also its own vocabulary. We call them non-standard measures. They are certainly unprecedented. But the reliance on the banking channel falls squarely in our mandate, which is geared towards price stability in the medium term and bound by the prohibition of monetary financing [central bank funding of governments]…One of the things that they (banks) may do is to buy sovereign bonds. But it is just one.”

In the jurisdiction of the eurozone then ‘non-standard measures‘ translates into quantitative easing and/or George Osborne’s imaginative brainchild ‘credit easing’.

ECB actions may be illegal according to Markus C. Kerber, Here are some specifics: Article 123 TFEU is violated by the purchase of the marketable securities on the primary market for fiscal purposes; even the purchase of marketable securities on the secondary market would be illicit in as much as it is no longer motivated by monetary considerations. Council Regulation (EC) N° 3603/93 of 13 December 1993 obliges “member states to take appropriate measures to ensure that the prohibitions referred to in Article 104 of the Treaty [equivalent to Article 123 TFEU] are applied effectively and fully; whereas, in particular, purchases made on the secondary market must not be used to circumvent the objective of that article.”

- Article 124 TFEU is violated by privileging marketable securities issued and guaranteed by certain countries (Greece/Ireland/Portugal); economically former and future issues by these countries are supported by the ECB and ESCB. That is a manifest distortion of competition and a discrimination against other eurozone countries.

- Article 125 TFEU is violated by circumventing or rendering ineffective the bail-out prohibition pursuant to it. Article 125 is as § 2 makes it clear a far reaching prohibition. ECB wrongly assumes – for example in its opinion on the ESM-draft – that it is not subject to the overall objective of “financial stability”.

- In as much as the intervention of ECB on the market of sovereign debt distorts competition between sovereign issuers of the eurozone, its practice is already incompatible with the overall objective of the TFEU: creating a single market without restraints of competition. Or shall we sacrifice competition and the welfare benefits of the single market for the ever more improbable rescue of the euro? That violation is particularly severe because Article 3 TEU, Article 51 TEU and Protocol No. 27 commit all Community institutions to respect the objective of creating a system of unrestricted competition. The ECB has done the contrary: it has in the name of euro rescuing organised a counter-revolution against market economy.(my emphasis)

The ‘non-standard measures’ taken by the ECB show that “the lines between this form of QE, and the direct monetisation of budget deficits, which is forbidden by the spirit of the eurozone treaties, are becoming increasingly blurred.” the ECB balance sheet is expected to be close to 2,800,000 by February 2012. The risk for Germany as the ECBs main equity owners is now higher than ever with the potential need to recapitalise the ECB’s balance sheet after an exit from the eurozone or defaults within it.

“in the present state of the eurozone debt crisis, sovereigns and banks are now inextricably interlinked.” the latest action from the ECB has now made it harder for countries in the eurozone, especially the core of the eurozone to either leave or let others leave without facing considerable losses, the options left appear to be either count your losses now and call it quits or they can build on the ‘fiscal compact’ creating full fiscal union with large transfers of payments going from the core to the spendthrift.

Lastly some info on the strange way banks in weak countries have been issuing debt, getting a government guarantee, and then posting them as collateral at the ECB, notably 40 billion of yesterday’s LTRO was done by Italian banks using 3 month zero coupon bonds. “approval of the budget law in the Italian senate later this week will include a provision for Italian banks to procure a government guarantee for debt that they issue. This means that Italian banks could use their own debt as collateral in the February operation as well.” the monti ponzi ?