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COC-ing about? EU must be joking

Greece 230x150
By Owen Sanderson
22 Nov 2018

EU authorities are allergic to complex financial products — except when they solve a problem for the EU.

Parts of the securitization market will become “simple transparent and standardised”, when new rules kick in this January. It’s the usual mess, with a last minute race to fix errors and disclosure rules that aren’t ready.

But it’s part of a broader drive to reward simplicity. Wary of pre-crisis “innovations” which combined the worst of derivatives and securitization, regulators have tried to encourage finance to get simpler.

Derivatives should be cleared, securitizations should be pass-through, and everything should be standardised and unbundled.

But when it comes to the eurozone’s weaker members, complexity is very much in vogue.

To skirt the EU’s state aid rules while still allowing, err, states to offer aid to banks, Italy’s GACS scheme, which guarantees NPL securitizations, has a price based on a basket of CDS of equivalent rating with a step up after four years. Now, because Italy looks riskier all round, the guarantee costs more — slowing the recovery of Italian banks at exactly the wrong time.

But Greece will go one better. The Bank of Greece is now proposing a scheme which transfers banks’ deferred tax credits (already an extraordinary piece of financial alchemy, in which losses are transmuted into capital) into an SPV, which buys non-performing loans from the banks. The SPV will issue a securitization, which the Greek banks and the state will subscribe, and, hopefully, some private investors as well.

If the above sounds like a head-scratcher, that’s because it’s a contorted attempt to do something simple — setting up a state bad bank — through the most complex means possible. Never mind STS, European authorities prefer their own securities to be COCs — complex, opaque, and confusing.

By Owen Sanderson
22 Nov 2018