tag:blogger.com,1999:blog-36227136.post6611719678185693209..comments2024-01-16T08:40:53.682+00:00Comments on <a href="http://www.openeurope.org.uk">Open Europe</a>: Collateral ThinkingOEhttp://www.blogger.com/profile/00556463374230498875noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-36227136.post-48824651500110728352011-08-29T04:43:11.063+01:002011-08-29T04:43:11.063+01:00Collateral? Now, that's a term we're all f...Collateral? Now, that's a term we're all familiar with. The banks require collateral from us - why not require collateral from them? Novel concept. Why wasn't this required at the bailout onset, starting with the very first bailout - including Fannie Mae, Freddie Mac, and Ginnie Mae, in addition to the Big Boys in the private sector? Accountability should apply to everyone, not just the taxpayers. (Oregon, USA)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-36227136.post-49781366796579149812011-08-24T18:27:58.073+01:002011-08-24T18:27:58.073+01:00Thanks for the comment anonymous (the first one). ...Thanks for the comment anonymous (the first one). Very detailed attempt at clarifying the situation. It could be that Finland is looking to compensate for this over-collateralisation risk. We would highlight though that all eurozone governments have agreed to change this structure (when they agreed to increase the lending capacity of the EFSF to €440bn), although it is yet to be fully approved by all national parliaments. Despite some concerns it does seem as if this EFSF increase will be approved, with most parliaments looking to do so within the next month or so. Once the changes are approved the EFSF loans will have an over-collateralisation of 165%, but their AAA rating will essentially come from the fact that AAA rated countries will guarantee around 102% of the loans. <br /><br />(See here for a good explanation of this agreement: http://ftalphaville.ft.com/blog/2011/06/21/600681/europe-calibrates-its-bailouts-comforts-markets/)<br /><br />We’d expect this new structure to be in place for the disbursement of any of the second Greek bailout loans, so any logic behind the Finnish deal should be taken in this context. So it could more along the lines of the increase reliance on AAA countries which has encouraged Finland to seek this level of collateral. The ultimate motivation does still seem to be political though, with the government being given little manoeuvring room by the parliament.Open Europe blog teamhttps://www.blogger.com/profile/14476470353790515912noreply@blogger.comtag:blogger.com,1999:blog-36227136.post-25729444401063633472011-08-24T18:02:42.786+01:002011-08-24T18:02:42.786+01:00Thanks anonymous. Good point. We’re not claiming t...Thanks anonymous. Good point. We’re not claiming that Finnish voters voted for collateral, but they did vote for a change in EU policy of some sort.Open Europe blog teamhttps://www.blogger.com/profile/13298566546867244328noreply@blogger.comtag:blogger.com,1999:blog-36227136.post-76386368097396251832011-08-24T17:04:08.972+01:002011-08-24T17:04:08.972+01:00Finns did not vote for "collateral" in e...Finns did not vote for "collateral" in elections. They voted for "debt restructuring." That is what "the left" promised before elections. After elections "the left" changed "debt restructuring" with "collateral" and after elections not a single word has come out about debt restructuring.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-36227136.post-76753728774356852402011-08-24T16:18:25.213+01:002011-08-24T16:18:25.213+01:00In a (probably futile) attempt to seek some clarit...In a (probably futile) attempt to seek some clarity here, if Greece gets loans from the EFSF as part of a second bail-out then presumably the EFSF, which is not an EU body but a Special Purpose Vehicle set up in Luxembourg by the eurozone states:<br /><br />http://www.efsf.europa.eu/about/index.htm<br /><br />will borrow more money from international investors to lend on to Greece.<br /><br />The EFSF has already borrowed a total of €13 billion through the three bond issues listed here, which are a form of Eurobonds:<br /><br />http://www.efsf.europa.eu/investor_relations/issues/index.htm<br /><br />And it has lent on €3.6 billion to Ireland and €5.9 billion to Portugal, a total of €9.5 billion:<br /><br />http://www.efsf.europa.eu/about/operations/index.htm <br /> <br />The bonds issued by the EFSF are rated AAA, because each of the eurozone states is required to guarantee 120% of its pro rata share of the repayments due to the bondholders.<br /><br />That is, if for example Greece failed to fully repay loans extended to it by the EFSF, and the other eurozone states then had to stump up to fully repay the EFSF bondholders as they had all guaranteed, then Finland might have to pay up to 120% of its pro rata share of the repayments due to the international investors, especially if other eurozone states failed to keep their own guarantees.<br /><br />http://www.efsf.europa.eu/attachments/faq_en.pdf<br /><br />"A12 - Would the EFSF default if one of its borrower countries defaulted? <br /><br />The credit enhancement mechanisms under the Framework Agreement are designed to exclude such a situation. If a country were to default on its payments, guarantees would be called in from the guarantors and payments could be made from the cash buffer. The shortfall would be covered by the: <br /><br />Guarantees <br /><br />Grossing up of guarantees (120% over-collateralisation) <br /><br />Loan-specific cash buffer <br /><br />Cash reserve <br /><br />If a guarantor did not respect its obligations, guarantees from others could be called in to cover the shortfall. All guarantors rank equally and pari passu amongst themselves."<br /><br />So it seems to me that when Finland demands that the Greeks provide 20% collateral on the Finnish share of any EFSF loans extended to Greece, it is in effect saying that:<br /><br />a) It is still prepared to guarantee its pro rata share of the repayments due to the EFSF bondholders; but <br /><br />b) It is no longer prepared to participate in that "credit enhancement mechanism" whereby it guarantees 120% of its pro rata share; and<br /><br />c) Instead it wants Greece to take over that extra liability it had previously accepted in principle under the EFSF "over-collaterisation" arrangement.<br /><br />And as the "over-collateralisation" under the EFSF agreement is clearly illegal under Article 125 of the Treaty on the Functioning of the European Union, and as arguably the compensatory "collaterisation" under a bi-lateral agreement between Greece and Finland is similarly illegal, it could be a case of two wrongs more or less making a right.Anonymousnoreply@blogger.com