The European Debt Crisis and the Euro - Page 116

On April 02 2013 22:48 Bermuda wrote:


Thank you. After reading the Bloomberg article, here is what I understand :

The Dutch banks have high quality loans (Because, historically, the Dutch repay their debt and are near 0 default. So they are really good quality assets). But, because of the Basel III rules, those cannot be used to fulfill the new liquidity obligations.

At the same time, worst assets (including spanish loans that have a way higher default rate) can be used.

It is important to understand that the Dutch banks don't have "a hole" of 270 billions. They have those 270 billions in high quality assets (mortgage backed securities from some of the best loans of the planet). But they cannot use it to fulfill their new european obligations because those loans were given at 95% the value of the home (Basell III rules accept only loans up to 80% the value of the home to count toward the new liquidity obligation).

It is problematic of course, but not as problematic as if they actually had to find 270 billions out of nothing. Because, even if they cannot use those loans for the new liquidity rules, the loans are still there. They still possess them.

Possible solutions :

1) They ask for a change in Basel III rules, because that part of the rules is stupid. Seriously, accounting risky spanish loans while refusing ultra secured dutch loans... wtf.

2) They sell those mortgage backed securities (possibly at a discount) to some private investors. In that case, they will have to come with the rest of the money (the discount). But it will never be 270 billions, it will be far less. And there will be buyers because those are high quality assets. The real problem being that no european banks can buy it, since it is not taken into account for Basel III (so they will have to sell at a discount to private investors).

TL;DR : yeah it is stupid and problematic but not as problematic as a 270 billion deficit. The actual amount missing is just the discount they will have to accept (probably a small % of the total 270 billion).