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Thursday, December 1, 2011

EU: Banking Crisis: Solving Financial Crisis - Taking destructive Potential off Banks' Balance Sheets

Author Thomas Ramseyer
Rescue of the World's Financial System
Special Situations ask for Special Action
The Goal is the Survival of the worldwide Financial System

European Central Bank (ECB) supporting Market
Banks to found Shareholder Company (SPV); they outsource all Derivatives into this Special Purpose Vehicle
ECB buys debt of countries shaken by politicians, rating agencies and markets. By the end of November ECB has bought government bonds of EU-members amounting to some EUR 203.5 billion.

Impakt accurate to textbook
1) Sight funds massivly mushroom
The public holds additional EUR 203.5 billion on sight (cash and bills) because of ECB action taken.

2) EUR considered shaking more and more
Investors sell EUR against other currencies such as CHF. These funds are held very short term. Alternativly investors may buy treasury bills or debt of Swiss National Bank (SNB).

3) Domestic interest rates are pressurized
Swiss Government yield curve hover dependent on duration between 0.01% (one year) and 0.93s% (10 year).

Swiss Government debentures are even issued at prices above par thus negative rates.

4) Escape from EUR
Banks sell EUR as well as USD to the Swiss National Bank (Switzerland's fully fledged central bank). The latter's foreign exchange assets broaden to CHF 305.281 billion. (evaluated in Swissfrancs: USD 103.01 billion, EUR 154.876 billion, Yen 20.8 billion, CAD 9.1 billion and others 7.078 billion)

5) Funds never leave their domestic markets
The Swiss National Bank invest the proceeds of foreign exchange transactions in the specific countries' treasury bill market. 

1) The content of the worldwide barrel does not change
The investors linger at the sideline. If the trust of investors and other institutions of the troubled countries thus in the earlier sold currencies ameliorates the weel will turn the other way round once more.

2) Investors are ready to act; they maintain liquidity
The investors linger at the offshoot. Once trust in the now ailing countries comes back the weel is turned back.

3) Recovery will upgrade economy - confidence ameliorates
EUR, USD and other currencies are bought back; money supply in Switzerland contracts. Same is valid for EU. EUR-bonds are being asked for again (e.g. Germany's flop emerged because of incertitude regarding the umbrella) or bought back by the ECB. ECB's money supply contracts; interest rates trend higher.

In a crisis the public is not ready to contribute equity to the banks' balance sheets. Credits not needed (high interest rates) are being cut. Thus the banks' debt/equity relation upgrade by restructuring the business activity. This will shorten the balance sheets. Unwinding of derivatives also contributes to the downsizing.

Because of severe uncertainty regarding further interventions of the central banks liquidity provided by foreign exchange transactions and other measures taken at very low interest levels the public does not ask for it nor the banks do offer it. Other reason also is the worldwidely faltering economy. Regarding the insecurity of the time horizon of the Central banks' and International Monetary Funds (IMF) action taken, stakeholders around the globe are reluctant to tap the market.

Remedy and Advice
Emergency situations ask for emergency measures
The financial system is concedered to survive

1) Similar to Swiss National Banks' stability fund
On the occasion of freeing UBS from "poison papers" ECB has to invent an identical construct: issue credit to the EU; management by ECB. EUR 203 billion are transferred to the special purpose vehicle. On account of EU's stability fund ECB accumulates depending on EU-members' debtduration bonds and bills with remaining lives of one month to four years. ECB focuses on Italy and Greece. ECB concentrates on Italy in the first place because one third of the latter's debt expire in 2012. Such papers are held until their final redemptions. As a matter of fact his turns out to be a guarantee of the EU.

2) All credit rating agencies' judgements EU does not consider
Rating agencies are disempowered regarding EU-members' government debt. The investors ascertain the Quality themselves. They enforce their research departments and take back responsibility.

3) The recovery of ramshackled EU-members' financial situations
are discounted by the Euopean Union.

4) World wide banks get rid of their derivative assets 
by forcedly putting them on the balance sheet of a share holder company at market conditions. Those banks hold shareholder capital of the company just found according to their ceded assets.

5) Unwinding of the items
The shareholder company unwinds all active transactions existing between the banks. The result of this unequally sense making Special Purpose Vehicel (SPV) will turn out to be zero. It can be liquidated.

The cost of unwind, foundation and liquidation are to be debited to the banks according to their stakes.

6) Further SPV to be found by banks
The purpose of this shareholder company is similar to a stock exchange's to enable private households' (institutions, private investors and governments) transactions. As those positions do counterbalance each other the total of the market value sums up to ZERO.

7) Revenue achieved from exchange transaction
The Result of the exchange activity is to be credited to the shareholders' accounts according to their participation. Turnover tax will be transferred to the government.

The impact of the measures taken is that the risk taking private households (institutions and private investors) and governments bear the netrisk. All influence to bank balance sheets thus are eliminated.
The volatility of the markets cools off. The banks gradually approach their core business which is to facilitate payments as well as reasonably sized credits.

United States President Obama's full-boldied announcement to provide support and help for the EU and the whole world including the US respectivly, must be the persuasion of the politicians of the countries with banks active in the derivative market.

copyright Thomas Ramseyer