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The SNB released data on its FX reserves regarding 2012Q3. Securities investments were CHF342.73bn while deposits 86.58bn in September. Here’s a breakdown for the last few months:

* Sources: [1], [2]

It is clear that the SNB managed to increase its reserves substantially while actually decreasing its deposits with foreign central banks (mainly the ECB). In Euro terms FX reserves increased €53.6bn, securities €71.1bn and deposits dropped €17.5bn. As a result, the growth in its reserves was not reflected on the Eurosystem balance sheet as during 2012H1.

Data on investment assets composition were also released:


What’s clearly impressive is the fact that the SNB was able to diversify out of the Euro and into other currencies such as the US$ and the BGP with Euro share dropping from 60% to 48%. Government bonds also dropped a bit from 85% to 83%. Calculated euro securities holdings went from €154bn in 2012Q2 to €164bn in 2012Q3, a change of only €10bn, despite securities increasing by over €71bn during the same period. In other words (assuming that all of SNB FX reserves are a result of its Euro floor), around €60bn were sold in exchange for other currencies in 2012Q3 which should be considered a large flow.

It will be very interesting to observe how the SNB reserves balances change in September.

There’s a lot of talk lately (again) about a possible Greek exit from the Euro in the near term future. Personally i find such scenarios a bit extreme since i cannot really think of many ways were Greece can actually be pushed to exit the Eurozone.

Regarding outstanding government debt, this can now be broken down in four categories. Loans from the Greek Loan Facility and EFSF, post-PSI government bonds, T-Bills and bonds held by the ECB. Based on Bloomberg data the post-PSI bonds outstanding amount is €62.4bn while T-Bills stood at €15bn in June 2012 (they were increased during August in order to pay ECB maturing debt).

The post-PSI bonds do not pay principal until 2020 and current coupons are only 2%, meaning that annual interest cost is only a bit more than €1.2bn. That is equal to a typical T-Bill auction reflecting the fact that the costs are easily financed by the existing T-Bill issuing mechanism. T-Bills are mostly held and rolled over by the Greek banking system, with a bit of help from Bank of Greece ELA financing. Consequently, all of the Greek tradable debt securities can be assumed to be ‘safe’ in the near-term. Loans and EFSF notes also only pay interest for now. The budget primary deficit has dropped significantly and based on Bank of Greece data till July it was only €2bn.

As a result, the main risks regarding debt refinancing include:

  • ECB held bond redemptions.
  • Interest payments on Greek Loan facility debt.
  • Covering the primary budget deficit.

Even if Greece were to default (in one form or another) to its payments to ECB, it would be legally challenging for the latter to consider this as a general default event and not allow Bank of Greece to accept government paper in ELA financing. Covering the budget primary shortfall can be managed by a couple of large T-Bill auctions while the latest €11.5bn packet is expected to turn the deficit into surplus by next year. My view is that European countries will not risk calling a default on their loans and will continue to service their interest payments through the escrow account. All in all, debt financing seems hard to become a trigger for an exit event.

The main risk in my view is covering euro outflows through ELA financing. Possible triggers are:

  • Reaching a ECB imposed limit on ELA financing with the ECB choosing not to increase BoG limits (and the latter honoring them).
  • Having the banking system run out of available collateral to post to the BoG.

According to the latest BoG balance sheet data, Greek banks have pledged at least €250bn in assets. Based on ECB data ‘total loans to other euro area residents’ in Greek banks balance sheets stand at €240bn while holdings of securities are at €41bn and remaining assets at €43bn (i am not so sure how much of the €64bn external assets can be used). It is clear that the situation is very tight and a small shock can push the system to its limits, especially since most of the remaining assets are valued much lower than par. Still, BoG can do accounting gymnastics and use government guarantees in order to value collateral much more favorably than their fair/market value.

Having the ECB set a hard limit on any of the BoG refinancing operations will basically transform the Eurozone from a monetary union to a fixed exchange rates area. Although it is probably theoretically possible, it is very difficult from a legal point of view (especially since BoG retains the risks of ELA and only provides collateralized loans) since it surely does not promote financial stability (but rather is used as a mechanism to protect the Eurosystem balance sheet) and will obviously introduce a huge risk in the Eurozone. Any holder of euros in a periphery country should try and ‘exit first’, before a possible ‘ceiling’ on outflows is reached, something which is not possible now given the unlimited overdrafts in Target2 liabilities of NCBs.

In summary, i believe that any exit will basically be the result of tight political negotiations and agreement. The ability of the rest of the Euro countries to actually push Greece out of the Euro (especially without risking full contagion in Spain and Italy) is extremely limited in my view.

Since the ECB released its MFI balance sheet data and monetary developments statistics, it’s very interesting to take a look at the level of (government) bond buying from Italian and Spanish banks in the era of 3Y-LTROs:

Net Change in ownership



S + I

Euro area loans to General Government
























Total Dec – Feb





* I am using credit to government in the form of securities for ‘Euro area loans to General Government’

The move away from government bonds during Oct/Nov is quite visible as is the large reversal after the first 3Y-LTRO (in the case of Spain it seems the reversal might have happened even before the LTRO) on Dec 22. According to the ECB, government debt in the form of securities in 2011Q3 was EU585,2bn for Spain and EU1590bn for Italy. As a result, the total net change for Dec – Feb is equal to 3.4% of government debt for Italy and 11.6% for Spain. The net change for Spain is very impressive.

Compared to total Euro area government debt net issuance, the net change for Italy + Spain is very large, especially for January, signifying a clear increase in holdings (net of new issuance). In total, Italian and Spanish banks acquired as much bonds as there was new debt issuance in the whole euro area for the Dec – Feb period.

Overall, it seems that in terms of lowering pressure in sovereign debt markets of Spain and Italy (which are the main European risks along with Belgium), the LTROs were a success. The open question (especially given the latest increase in bond yields for both countries) is wether this effect will be long lasting, especially since fundamentals have not changed significantly, with both countries in deep recession and with Spain facing large central and regional government deficits, huge unemployment and a significant NPL ratio with a banking sector under serious stress.

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Kostas Kalevras

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