Last Updated Sep 22, 2011 1:53 PM EDT
When the IMF was writing the Global Financial Stability Report it evaluated sovereign bonds held by banks at their market value (mark to market). As the Financial Times reported:
Although the IMF analysis may be revised, two officials said one estimate showed that marking sovereign bonds to market would reduce European banks' tangible common equity â€"- the core measure of their capital base â€"- by about $287 billion, a drop of 10 percent to 12 percent.Further, the officials said, that number gets a lot bigger -- perhaps doubled -- when you add in the impact of European banks holding assets in other banks.
The ECB and European governments said these numbers were crap, and so nothing this clear appears in the final report. Instead we got:
Sovereign risks have spilled over to the banking system, and these spillovers have grown as the sovereign crisis has spread from Greece to Ireland and Portugal, and then to Spain, Belgium, and Italy. Nearly half of the â‚¬6.5 trillion stock of government debt issued by euro area governments is showing signs of heightened credit riskAnd:
Spillovers from high-spread euro area sovereigns have affected local banking systems but have also spread to institutions in other countries with operations in the high-spread euro area and with cross-border asset holdings. In addition to these direct exposures, banks have taken on sovereign risk indirectly by lending to banks that hold risky sovereigns. Banks are also affected by sovereign risks on the liabilities side of their balance sheet as implicit government guarantees have been eroded, the value of government bonds used as collateral has fallen, margin calls have risen, and bank ratings downgrades have followed cuts to sovereign ratings."Spillover" became the term used to not describe the situation. Spillover is such a novel measurement that page 18 of the report is dedicated to explaining it.
The words may have been changed, but the report couldn't change the facts. Those facts were confirmed yesterday when the ECB said it had "abolished the eligibility requirement that debt instruments issued by credit institutions, other than covered bank bonds, are only eligible if they are admitted to trading on a regulated market." This means it will take anything -- and might consider a kitchen sink -- to ensure banks have enough cash.
The last time the ECB did this was right after the Lehman Brothers collapse in 2008.