REVEALED: Eurodebt now 80% of global total. But ECB official claims that central bank “is immune”.

French debt growth out of control: ‘no economic reason why the ECB could not operate with a hugely negative net worth’

So why is Greece on the rack?

Take a look at the ECB’s latest paper on Short Term European Paper (STEP) – bond debt to you and me.

In the one day from the 8th to the 9th of August, it grew three billion euros. In the day from 9th to the 10th of August, it grew four billion euros. The rate of acceleration is still growing. It is today nearly 480 billion euros…a YOY increase of 100 billion euros, aka 25%.

Now take a look at French private (but especially bank and government-related) borrowing in the STEP sector.

Whereas other borrowing across Europe still looks dodgy at two or three numerals of millions per programme, the French debt is more commonly at four to five numerals.

French social security, €10.3bn, Credit Agricole €12.4bn, BNP Paribas €60bn, SocGen €39bn: these are all massively in excess of Holland, Germany, and even Italy.

And it’s clear, looking across as well as down, how incestuously interrelated all the buying and selling of this debt is.

But here’s the bottom line: whereas the total debt denominated in euros is €374bn, expressing other currency debt in euros gives us a US figure of 50 billion, and a UK figure of 23 billion.

Euro STEP debt, as of three days ago, accounted for 80% of the global total.

Surely the ECB is, one day soon, going to wind up insolvent? Well, late last year I unwittingly wrote something that isn’t true in relation to ClubMed sovereign debt, to the effect that if the ECB could no longer finance its operating expenses out of earnings, it would require support from  national government central banks.

Most observers assume (I think) that there is a huge difference between the US Fed buying its own Treasuries, and the ECB buying sovereign bonds of, say, Greece. When buying Treasuries, the Fed only does monetary easing; it does not acquire credit risk, because it IS the creditor. When buying the sovereign bonds of Greece, Italy, Spain and Portugal, the ECB however does monetary easing as well as acquiring credit risk.

Not so, said the ECB bureaucrat dinner guest of a prominent Greek commentator a few weeks ago. The ECB has no credit risk because it is constituted in a way that allows it to continue even if all its assets are negative in value.

As it happens, he appears to be correct: if you look at the ECB’s Constitution, as so often with things set up by the EU, so great was the hubris at the time, disaster clauses are absent….after all, there weren’t going to be any disasters.  For instance, no provisions were made for the exit of a member State from the eurozone. So too is the insolvency of the ECB never addressed in its Constitution: the only references are to reserves: (my Italics)

33.2. In the event of a loss incurred by the ECB, the shortfall may be offset against the general reserve fund of the ECB and, if
necessary, following a decision by the Governing Council, against the monetary income of the relevant financial year in
proportion and up to the amounts allocated to the national central banks in accordance with Article 32.5.

And at 32.5, we find:

32.5. The sum of the national central banks’ monetary income shall be allocated to the national central banks in proportion to
their paid up shares in the capital of the ECB, subject to any decision taken by the Governing Council pursuant to Article 33.2.

Just to be on the safe side, however, this article appears right at the end:

The ECB shall enjoy in the territories of the Member States such privileges and immunities as are necessary for the performance
of its tasks, under the conditions laid down in the Protocol on the privileges and immunities of the European Communities.

The are two pretty obvious extrapolations from this. First, the ECB’s Governing Council can do what it wants, when it wants, regarding shortfalls and income. And second, given the nature of how banks conduct their insane accounting rules in relation to outstanding debt, without any formal default by the national central bank’s Sovereign, Mario Draghi can take on debt from now until Domesday with no apparent ill-effects.

But what Dinner Guest ECB man claims goes beyond even this: his point is that the ECB’s Constitution can effectively refuse to recognise any outsider’s definition of it being insolvent. His words (roughly) are presented by the correspondent as:

“There is absolutely no requirement on the part of the ECB to recapitalise should it end up with a negative net worth after a significant write-off of bonds. The ECB could buy all the sovereign bonds of  all the  eurozone countries, end up holding several trillion of them – but even if all of those sovereign bonds defaulted and would never get paid, the ECB would survive perfectly well. It would simply show a negative net worth to the tune of several trillion euros”.

It gets madder, does it not?

But all this must make the average Greek – even the average Greek politician – ask why such a big deal was made about August 20th for the repayment of Hellenic bonds, when the ECB could absorb debt and even default indefinitely.

And above all, it puts the EU on the spot in relation French debt. How long will it be, I wonder, before Paris finds itself in the same spotlight as Madrid, Rome and Athens?

47 thoughts on “REVEALED: Eurodebt now 80% of global total. But ECB official claims that central bank “is immune”.

  1. The EU moves in mysterious ways. Why, as you say in the context of Greece, if the ECB can operate with negative equity of infinite size indefinitely, doesn’t it just buy up all the rotten debt around the EU and sit there gloating over it? Why doesn’t it keep doing that every year for everyone, for as sure as God made apples, the bandwagon will roll.

    The answer must be that someone, somewhere finds this whole concept as ridiculous as it surely is. Someone German. Not someone Italian or Spanish or Greek or Portuguese, they would like to indulge in more financial fiction as long as it benefits them.


  2. Sounds to me like bankruptcy has become a thing of the past…….perhaps we should individually try this in the EU Courts, seeing as we are all equal…..hahahahahahhahahaha


  3. Pingback: The Eurozone is stabilising - Page 1391

  4. JW,

    Your headline “Eurodebt 80% of Global Total’ could you please tell us ‘Total’ of what?

    Global sovereign, financial, non-financial, household debt or all the fore-mentioned?

    You then appear to illustrate you article with debts in the tens of billions and one of E374 Billions, I must have been dreaming but I have been reading (and, silly me believing, with a plus or minus let us say 40%, that the world debt was in the order of $700 trillion) so that to say the least I am perplexed.

    Did you suffer ‘little finger syndrome’ today, or is it me that needs a reset?

    Finally if you are confirming that no one, due to rehypothication, derivatives, SPE’s etc., knows what the debt is Gobally, but have a dread that is more than reality can bear and certainly repay I am with you.


  5. Naive question coming up….
    If the ECB can ‘buy’ trillions of euros worth of sovereign bonds, what does it buy them with. Does it print indefinitely, does it borrow, if so from whom, does it use the ESFS or as yet unratified ESM, or is it a case of the ECB computer crediting the sovereign computer with unlimited credit?
    I think my brain is going to explode….


  6. Alter Ego
    A tad harsh.
    1. It’s the headline. It’s 80% of all bank/sovereign interrelated paper debt. It’s 7 times that of the US equivalent – and yes, I did say ‘equivalent’.
    2. Not in tens of billions but 1,2,3 and 4 figures before the noughts in millions.
    3. Do look at the French bank.sov debt. It is in the region of 5-10 x bigger than anyone else’s…and growing faster.
    Wethangyoo, Christine Lagarde…


  7. The Story has all the makings of a change of probably catastrophic proportions. Now, has anybody mentioned the Mayas’ end of days?


  8. Tarfu
    Me too. I think that’s the idea. But it still doesn’t beat the Citi clown on Tuesday and his ‘Merv has made a profit on QE’.


  9. And annuva fing Alter
    First block of bold:
    ‘Euro STEP debt, as of three days ago, accounted for 80% of the global total.’
    So it clearly doesn’t mean chammy leathers now, does it?


  10. Tassos, it’s not exactly the end, AIUI, more of a re-boot, as far as the prophesy goes, if you believe it.
    Anything that changes the present staus quo seems worth a punt in my mind :)


  11. JW,

    Thanks for reply, enough said on that.

    But has anyone really got a handle on Bank debt French or other nationality?

    That is the problem, but to my untrained mind, in matters banking, the last thing to do is add debt to cure a undefined complex financial debt problem (there is, imo very good reason to finance education and ‘sound investments’ (recognising some % will turnout mal-investments)).

    First get an accurate numerical definition of the problem before wasting any good money it seems CB’s think they can utilise the game theory Martingale strategy (double down) until one day they will wake up and find they have cured the problem.

    I just think they are delusional


  12. An ECB with a positive value has always something it can sell to soak up liquidity with, when inflation comes along, but an ECB with a too large negative value cannot do that… and so how much negative value is too much negative value, so as to force us to hold on to our hats since these will be worth millions of euros?


  13. My poor old mind simply boggles. What happens to the Global Economy if other Central Banks decide (or rather their Governments) on a similar course?


  14. A reboot it might be but it could involve a lot less pain for the common man and perhaps a hint of justice.As this post shows, i can see no intension to move to a better future anytime soon.


  15. Well I’m glad you are struggling Alter because so am I. All these figures seem fantasy, how global debt can be measured in several hundred trillions when until 5 years ago we rarely heard the word billions, beats me. For instance, successive UK governments have overspent 5 million here and 10 million there but how did we get to need to print 325 Billion just to keep the lid on?

    It’s fantasy money and if that is right how come anyone has any faith in it anymore?

    Happy to declare, I jusy can’t get my head around it.


  16. The EZ is strangely reminiscent of Jim Slater’s Slater, Walker Securities in 1974,a financial conglomerate that used dubious accounting for the value of its investments,before it’s failed ‘merger’ with then mighty Hill, Samuel.It collapsed into the hands of the Old Lady,was rechristened Britannia Arrow, and slowly wound up.IMHO,we are approaching ‘end game’ for large parts of the EZ( a rerun of 1974),and some panic selling of equities and all but the best ranked debt instruments,sovereign or not.All a technically insolvent ECB could do is ,yes, print,if that passed muster with Karlsruhe or ,more likely, the German electorate,if the market will wait.It won’t wait beyond end September,at the latest,not least because the commercial property markets,in both Spain and Italy,no longer function,as the FT reported earlier this week.


  17. The Rules of the EZ…non-evidenced bollucks contruction.

    It’s simple really, no one is leaving the EZ.
    It is not possible for any State once they have joined the EZ to leave simply because there is no rule allowing them to do so.

    If a populace elect a Government that decides it wants to leave then it will be politely pointed out that they can’t, if they suggest a referendum can decide it then the Government will be legally replaced by one who will stay in.
    (by having an election or suggesting a referendum the Government/populace demonstrate their law abidability, therefore when a lawful replacement is installed, it will be respected)

    In fact the only way a State can legally stop being a member of the EZ is to stop being a State.
    ie. a violent and bloody overthrow of the existing regime and the toppling of the institutions that represented that State.
    (a new State formed may have the same name as the Old State but it would be a completely new entity)

    A violent and bloody overthrow of an existing EZ State is unlikely to succeed because the EZ rules allow the EZ to utilise the EGF to suppress any dissent.

    If however, against all the odds, the revolution worked then the Old State would be declared extinct, all debts held by the ECB (and member CBs) would be frozen and covered with tarmac, these debts would no longer pay interest but would still exist at face value on the books of the ECB (and CB’s), over time these debts would decrease in relative value due to inflation and when they have been safely defused (however long it takes), they would be retired.

    So if no one can leave and the debt can’t die what is the point of all this austerity, crisis and bond shuffling ?

    Full fiscal and political union (the original objective) would take decades to achieve as member States slowly accede powers to the centre and realign the populace, the Crisis has given them a once in a lifetime opportunity to speed up the desired outcome.
    (the leaders of the States have always believed in the project, it is the populace that must be convinced of the benefits whether they like them or not)

    As I said at the top, I have no evidence of any this and it could be complete bollucks, if you ask any politician or official it will be denied, but if you look at what they do despite what they say then this is the only logical conclusion.

    No one is leaving the EZ.


  18. @BR: Yep, that pretty much sums it up I think. Funny how all the ‘rules’ they abide by and all the ‘rules’ they choose to ignore only benefit the EU.
    Perhaps our best hope is that the Euro becomes the reserve currency knocking the dollar off it’s perch and the US invades everybody to reinstate the dollar’s hegemony.
    Whatever happens, we are in this for a very long time, perhaps decades.


  19. Is not the end game the point at which enough of the population of Europe realise that the [Euro] currency is worthless?

    Another one who can’t get his head round this.

    btw – I thought USA sovereign debt was iro £16 trillion ? If so, how does Euro debt come to be 80% of global debt? You’re going to tell me I’m comparing apples and pears …..


  20. This is ECB debt only, not global debt
    The ECB Total debt as refered here is €465.5bn broken down as follows;-

    In €uro’s 373.3bn = 80.2% of the Total above
    in $USD 50.3bn = 10.8%
    In £GBP 23.3bn = 5%
    In JPY 0.6bn = 0.1%
    Other (fudge pot) 18.0bn = 3.9%
    Total 465.5 bn = 100%
    On Amounts outstanding Tab, near the bottom


  21. @jwoo: don’t underestimate just how much money has been printed over the last 4 years. Thats the reason the figure of “billion” has become so commonplace and with another couple of QEs I’m sure we’ll see the first MSM use of the number “quadrillion”


  22. Pingback: John Ward – Revealed : Eurodebt Now 80% Of Global Total. But ECB Official Claims That Central Bank ‘Is Immune .” – 17 August 2012 | Lucas 2012 Infos

  23. ‘We CAN break free from the shackles of Brussels’
    After 13 years as an MEP, Daniel Hannan’s knowledge of the way Brussels works is second to none. Now he has written a forensic analysis of why it’s rotten to the core. Yesterday, in our exclusive serialisation, he examined how the euro has brought ruin to Europe. Today he argues that Britain must break with Brussels if its economy is to prosper again…


  24. All these figures may be correct, but here in Belgium (2 bust banks, at least and very nice income from the Sprouts parasites) such matters are not believed by well educated people. Massive investment in BTR properties, just in case either from repatriated ‘dark’ money, or liquidating of equity portfolios:NOT bonds(held to maturity; loss ‘impossible). Government not worried at all: everything still indexed. Property income lightly taxed. Bust banks still selling leveraged products to retail suckers. Somebody is wrong.


  25. I suspect people are forgetting that the ECB is a central bank. If they choose to, they can create money out of thin air, so in that sense they can never be bankrupt, they can debase the currency whenever they feel like it and monetise/inflate the debts away. The real argument is about timing. Germans don’t want them to monetise anything except in return for real structural change and control over everyone else’s budget (power is delightful and absolute power is absolutely delightful), but Greek and other Mediterranean kleptocrats, for obvious reasons, want the money first, with changes nev – I mean later. What will happen is the system will collapse, probably because the Germans will bail when Draghi prints due to their extreme aversion to increasing the money supply*. And he’s going to have to.

    *curiously the Bundesbank was perfectly happy to do this as recently as 1975, according to A E-P in the DT. I daresay German money printing is qualitatively different to everyone else’s money printing.


  26. In simple terms you could call it all a big game of Chicken between the ‘feckless’ Clud Med and the ‘virtuous’ Northerners. No one wants to be first to exit and get lumbered with the collective guilt for destroying the project. Especially the German governing class, since as a nation they remain on probation for previous misdeeds.


  27. A fully armed sovereign nation can do pretty much what it likes, whatever the fine print of treaties written 20 years ago.


  28. Here we a have a profile of this contributor…
    Very bitter
    Lacks argument structure
    Probable manual worker or unemployed
    loose cannon tendencies


  29. Pingback: EXCLUSIVE: Troika to accuse Greeks of building secret survival fund | A diary of deception and distortion

  30. @RBD: if you want to take the time to read the whole article and following comments you’ll find your criticisms will be answered.

    Question: What’s with the new brand of comment threader here recently. I’m all for debate and differences of opinion but why does it now seem to need personal attacks and insults (particularly personal attacks on JW?)? Just because we can’t see your face, it doesn’t mean you have to leave your manners at the door.


  31. OKay…so how does this square with:

    “The UK has Maximum Possible Loss of €149.2 billion on current capital and commitments to the institutions involved in the financing of the EU and the euro. That does not include any exposure through the International Monetary Fund.”


    “As one of two remaining large EU Member States with a AAA-rating the UK plays an important role in back-stopping the EU and the euro”.


    “It is critical to the EIB that it retains its own AAA-rating,…… to maintain its AAA-rating, a call on the remaining large AAA-rated shareholders is likely.”


    “….As such the UK, as an EU Member State, could not stand by and see the ECB fail. Letting the ECB go under would imperil the UK’s AAA rating, as could the cost of bailing it out”.

    Does this mean the Uk doesn’t have to worry now about bailing out the ECB? Is any of this paper relevent? Apart from having most likely underestimated our exposure….


  32. Think you’ll find when push comes to shove the Germans wont be too bothered about ‘shafting’ the Euro. Served its purpose now, so they will just move onto new games.


  33. You should read Bernard Connolly ‘The Rotten Heart of Europe’. He had it on the money with his study of ERM. Applies in spades to EMU. The whole thing is absurd and I for one simple do not understand why so many clever people were ever duped by this farce.


  34. Pingback: John Ward – Troika To Accuse Greeks Of Building Secret Survival Fund – Alarming French Debt Data Shift Eurozone Balance Of Power Back To Berlin – 17 August 2012 | Lucas 2012 Infos

  35. No way to exit the EZ…?

    What happens if an EZ country surrenders itself to a non-EZ country?

    Please indulge me in a silly example for the sake of illustration, to see where it takes us…

    Supposing Germany surrendered itself to the UK (actually, is WW2 legally over yet?) and became another UK country like Scotland or Wales? Or, maybe it could do it in the form of smaller “countries” such as Hessen and Bavaria, etc.

    So, then the DM could be introduced by the UK Parliament as a temporary currency in Germany, We would see what its intrinsic value drifted to.

    Strangely enough, it has been estimated that if Germany left the EZ and introduced the DM, it would rise in value – we might even find that it rises to Sterling-ish values and could then be eliminated.

    On the other hand, that would probably be a replay of the ERM in 1992, since momentary parity is no proof of sustainability.


  36. Is RBD actually BT? Now that makes sense.

    And yes BT, the posters who asked about the numbers involved had their questions answered. See above.

    And boris is a tit.


  37. Well technically if Germany ceded to another nation or broke itself up into a couple of smaller countries then Germany would no longer exist and so wouldn’t have left.
    The new countries would not be members of the EZ as they haven’t joined according to the entry rules.

    I don’t think just renaming Germany to New Germany would cut much mustard though.

    One of the major problems with anybody leaving is that the national institutions are intertwined to such an extent within the EZ that these would have to be created anew.
    It is the institutions that define a State so abolishing the old ones and creating new ones (like what happens in the violent and bloody overthrow scenario) does create a New State.

    Those who currently hold power in the institutions are unlikely to go along with this as they may be thrown out with the old and so have a vested interest in maintaining their position (at anyones expense as long as it is not theirs)


  38. Pingback: Troika to accuse Greeks of building secret survival fund [The Slog] « Mktgeist blog

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