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Time Bomb: Banks Pressured to Buy Government Debt

[CNBC] US and European regulators are essentially forcing banks to buy up their own government's debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.

Regulators are allowing banks to escape counting their country's debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.

While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.

"Captive bank demand can buy time and can help keep domestic yields low," Lorenzen wrote in an analysis for clients. "However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn't used very prudently."

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I thought the banks ran

I thought the banks ran everyone and everything... Guess not.

SteveMT's picture

This "Creature" is now uncontrollable.

The banks have printed so much money that they can no longer control this beast. There is no way to predict where the money will go.

Bond Bubble

Ron Paul predicted this just as he predicted the Housing Bubble and the Tech Bubble. From what I have read, the collapse could happen withing a month...true? I have no idea but when one of the European countries (I'll try to find the article, it was on Drudge) issues bonds UNDER 0% (which means that people are paying to buy the bonds to keep their money safe) then we are in DEEP DOODOO. I think the country was Germany...I need to check. Just a matter of time and sine the FED is not doing another QE the market was dropping like a rock Friday and Gold & Silver was rallying. Be prepared, could be a year, could be a day BUT as Dr Paul says..."The FED has run out of options"

This is the FED bubble

Yes, this summer it's time to get out of US Dollar assets. US GOV DFIs are at 1.45%, and inaccurately stated inflation is +2.4% so these investments are essentially worthless.

Folks are already calling this the "CRUEL SUMMER". Since the 5 YR TIPS from 2007/08 vest over the next 12 months...well ? I think we all are seeing the picture.

"This isn't what the govern meant"

"Win the crowd and you will win your freedom"

We already have negative real interest rates.

The present interest rates set by the central banks are all below the rate of inflation. These are negative real interest rates. The only reason they keep buying bonds is because they are borrowing short term and lending long term and pocketing the difference. They then dump the bonds onto the Fed and start all over again. They are front running the Fed on predetermined signals from the Fed.

This is what causes the bond value to rise (falling yields) which over time leads to capital destruction as corporate balance sheets show increasing liabilities with no corresponding rise in assets when marked to market. This is especially true in a global market where growth is the dominant theme and balance sheets are 'efficient" i.e. loaded with debt. This is where Romney made his fortune.

This is what has been happening for 30 years and why the economy is in a parlous state. In other words the Fed is trying to create inflation by issuing debt but is only succeeding in creating deflation because the credit they are issuing is all flowing downhill into the bond market where the action is, causing rates to fall and values to rise.

They can keep this up for some time UNLESS the paper gold market goes into permanent backwardation. This is when the spot price is much higher than the nearby futures price for a long time. Then gold becomes unobtainable at any price, the paper gold market shuts down and the irredeemable currencies fail because believe it or not they depend obliquely upon gold and when gold goes into hiding they become worthless.

I believe the real canary in the mine is the gold market not the bond market.

"Jesus answered them: 'Truly, truly, I say to you, everyone who commits sin is a slave to sin. The slave does not remain in the house forever; the son remains forever. So if the Son sets you free, you will be free indeed.'" (John 8:34-36)

Race to the bottom EUR vs. USD

Yes, but 5 YR TIPS issued heavily in '07 and '08 are vesting NOW. Either they print to pay or default. Either way the loser is the US$. If the raise interest, America is foreclosed on homes. Between EUR and USD it is a race to the bottom.

Some slightly more solid countries are buying substantial qtys. GOLD...aka Korea, Russia, China.

"This isn't what the govern meant"

"Win the crowd and you will win your freedom"

SteveMT's picture

Just the bailout in Europe alone has cost over $2.4T,....

with no end in sight. However, as the euro decreases in value against the dollar, so does the cost of the bailout.
Europe's Bailout Costs In One Chart: €2 Trillion And Counting
[See graph at link.]
This is what is known as a sunk cost, because last time we checked (and just as we explained back in March at the market highs when everyone was euphoric that Europe is now fixed) nothing has been fixed, and Europe is one 'rogue' democratic vote away from an EMU exit, and thus oblivion (or so they said last year, now everyone is prepared for a Greek departure, or so they say now, expect for the Greeks of course - they go straight to the 10th circle of hell and do not pass go). The truth is that by the time the status quo finishes its extend and pretend game, which incidentally has only one real outcome, the €2 trillion spent to date, will be orders of magnitude higher...

Basically if you overlay that with 08 TARP AND 09 TALF

Bernake and Geitner promised US$ to assist the IMF, so that sum is undetermined cost at this point. However, based on the chart referred in your comment, we will have another hurdle to cover in 2015 as the treasuries used to fund EU BO come due in 2015. My guess would be these are TIPS, which means inflation protected and with the printing coming later this year we cannot cover the '15 interest without another major printing run.

I reiterate, "not everyone comes out alive".

To anyone thinking Romney is crazy, he is, Recall this from the Bloomberg debate...

MS. GOLDMAN: Thank you. Governor Romney, it's 2013 and the European debt crisis has worsened, countries are defaulting, Europe's largest banks are on the verge of bankruptcy, contagion has spread to the U.S., and the global financial system is on the brink. What would you do differently than what President Bush, Henry Paulson and Ben Bernanke did in 2008?

MR. ROMNEY: Well, you're -- you're talking about a scenario that's obviously very difficult to imagine, and -- and -- and --

MS. GOLDMAN: But it's not a hypothetical because more than half the --

MR. ROMNEY: There -- it's still a hypothetical as to what's going to precisely happen in the future...if I were president of the United States, and try and prevent the kind of contagion that would affect the U.S. banking system and put us at risk.

"This isn't what the govern meant"

"Win the crowd and you will win your freedom"

Why ?...It's time to short the US Government

Remember 2007-2008 ?

TARP, Bailouts, Fannie and Freddie purchases were funded through things like TIPS (Treasury Inflation Protected Securities), particularly the 5 YR treasuries...which are coming due SOON. How will this be funded ? I think most Dr. Paul supporters already know...

If you are investing...protect yourself...short the US GOV. and the dollar.

"Not everyone comes out alive"

"This isn't what the govern meant"

"Win the crowd and you will win your freedom"

don't buy their debt

so goverment collapses and becomes smaller and less milithugs harrasing people on a daily basis.

Banks are given the privilege to buy National Debt.

The Banks are gifted cash... "legal tender." Then incantations are preformed. Mystically, those "legal tenders" do not go up in smoke. Those mystical papers to to paper the empires of the world.

Then something truly unbelievable happens to banks. Should any of that legal tender be deposited into their coffers, they are granted the privilege called "fractional reserve." That is where, without any funds of their own, they loan out depositor funds ten times over... 10 to 1 fractional reserve... Or worse (e.g.: 200 : 1 leverage).

Some of what is written is not true. Seems to be much worse.

See: Financial Stabilization Act, 2008. It eviscerated fractional reserve banking.

Also see: Loans out of thin air. See what other can not see.

Disclaimer: Mark Twain (1835-1910-To be continued) is unlicensed. His river pilot's license went delinquent in 1862. Caution advised. Daily Paul

public debt

They buy public debt with bailout money. Lol

How do we get on that deal?


Bailout extravaganza was theater. Who disappeared our economy?

A pittance. Measured in mere billions.

Most "Too Big to Fail" churn through trillions.

One private company based here in the USA, rarely mentioned in our free press, churns near 2 Quadrillion each year. How can it be?

$1.66 Quadrillion Cash Flow Racket Run By Monopoly Boyz! by Mark Twain 04/08/2012

Fed Inflates Itself Beyond "Alice in Wonderland" ... $2 Quadrillion by Mark Twain 09/11/2011

Disclaimer: Mark Twain (1835-1910-To be continued) is unlicensed. His river pilot's license went delinquent in 1862. Caution advised. Daily Paul

Bus transfers?

So in essence what your are saying is the money is worthless and it is no different than if the country were to trade in bus transfers for example.


What money? I was refering to bank debt notes...

masquerading as paper-money. Paper bank notes trade as if they were worth their face value.

On your question about bus transfers, you are on to something. If you mean bus tokens, you catch some of what I implied. Not worthless... After payment tendered, you go for a ride.

Disclaimer: Mark Twain (1835-1910-To be continued) is unlicensed. His river pilot's license went delinquent in 1862. Caution advised. Daily Paul

Mises got it right...

... when he said, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved."

Mirand Sharma

What is the "End Game"?

Is their bankster fiat money scam coming to end naturally as all fiat currencies do and they simply have no way out of this mess other than to print more money, rob the people through massive inflation and prolong a crash of epic proportions? Perhaps, this was the plan all along? Print....print....print, loan....loan....loan....have governments buy up debt and put it on the tax payers backs. The system seems to be set up to destroy all or most of the currencies. But for what? To destroy european and US monies and set up China and the Yuan as the new global currency? To set up one world currency ? Will the banks own each countries natural resources b/c of debt default?

Either way, at minimum, massive inflation is coming b/c they will keep printing monies until total economic global or US collapse happens. Will they pull out their ace card and go for WW3 to determine the victor? As the RP revolution continues to make progress and we try to take back control from within (hopefully before the above mentioned happens), what do we do? It's very frustrating trying to play along side their chess game and guess ( ie...invest what little or lot we have ) and secure our wealth. You just don't really know for sure b/c EVERYTHING is manipulated by them. Even the hard assests!

No one knows for sure

The Austrian economists I read predict this miasma of government debt and monetary inflation will continue for a while. The politicians will "kick the can" as long as possible. There are only two ways this can predictably end: either a Great Default or high inflation. The central bank will eventually have to accept reality and stop creating money in order for banks to clear their excess reserves. When this happens high inflation will be here.

The good news is high inflation rarely lasts for more than a few years because currencies are quickly devalued. It seems possible that the endgame is for a new fiat world currency. Throw a large war into the mix and we'll lose most of our remaining liberties.

You know how to prepare for this. Learn to be self-reliant. Have a supply of food, water, and other necessities. Buy them now while they are cheap. You may not be able to afford them in a crisis, and you don't want to be desperate enough to forfeit your gold & silver.

Thanks for the input.

Thanks for the input. Got the supplies you mentioned already. The post was more along the lines of where to put....move...hide investments in order to retain most, or all ( or heck even earn more ) of what little wealth we have. Like I said, they manipulate everything. Gold, silver, land, stocks and bond markets, oil etc...
So is it certain stocks like energy, oil, and or mining stocks? Is it get everything out of the market? Is it buy all precious metals even at current prices? Is it buy farmland at current prices, or will that deflate also? How about moving dollars to Chinese yuan? Hard assets, tangible assets I get it. It's like..... Sell out of everything in the market, close your bank accounts , buy a massive safe and hoard. But hoard what? LOL

It's quite scary.

Buy Our Debt!

"You MUST buy these treasury bonds! Our puppet MUST remain in office! If you don't buy our debts then the economy will enter "noticeable" depression and the public will no longer focus on gays, abortion or immigration. They will instead focus on Ron Paul and his damn message of liberty! NO! YOU WILL BUY OUR DEBTS GODDAMNIT!"

Da Pharaoh Has Spoken! /\

"It is the duty of the patriot to protect his country from his government." - Thomas Paine

(╮°-°)╮┳━┳ (╯°□°)╯┻━┻ "RON PAUL 2012 DAMNIT!"

Hah! That's a laugh!

The banks aren't being forced to buy gov't debt as this story says. They're happy to continue buying gov't debt as long as the central bank keeps enabling it by providing loans below 1%. They see it as a guaranteed return, and a lot less risky than loaning to actual people and small businesses. Meanwhile the governments love this as well! They are able to continue spending without cutting their budgets. The cheap debt continues to pile up and the people have no way to stop it.

This convenient arrangement could go on for several more years before the central banks stop inflating the money supply to help their friends.


Burn down the paper house. Topple the house made of cards. I think we would be better off with an economic collapse. maybe the elites have a point, we have to destroy it to recreate it. Lets just make sure we are the ones recreating it.

"But you must remember, my fellow-citizens, that eternal vigilance by the people is the price of liberty, and that you must pay the price if you wish to secure the blessing." - Andrew Jackson

The Banks, along with Government

are all becoming like dogs chasing their tails. It's a circle jerk.

"If we lose freedom here there's no place to escape to. This is the last stand on earth." -Ronald Reagan

When they took us off the Gold Standard they took away our money... in order to make it theirs. -OneTinSoldier

Satanic power over this planet is coming to an end

Love will be victorious!

LL on Twitter: http://twitter.com/LibertyPoet
sometimes LL can suck & sometimes LL rocks!
Love won! Deliverance from Tyranny is on the way! Col. 2:13-15

I hate to be the one to break it to everyone...

There is no such thing as God or Satan. People make their own good and evil, and there is plenty of both to go around.

Please God let it be soon.

For all our sakes.

I smell US intervention in banking affairs AGAIN!

I'd earlied read on Zerohedge that Tim Geithner was acting to intervene in the EUR crisis.


Perhaps this is part of that screwy plan...

Be Afraid Europe, Be Very Afraid - Tim Geithner Is Now "Helping" You
Submitted by Tyler Durden, Zerohedge
05/31/2012 17:51 -0400

If there was one piece of news that could force an all out panic in a market already on the edge, it is that outgoing (as in finally departing) US Treasury Secretary, Tim Geithner, was getting involved in the European Crisis. Sadly, this is precisely what happened.






More from Bloomberg:

U.S. Treasury Secretary Timothy F. Geithner, Spain’s deputy prime minister, Soraya Saenz de Santamaria, met to discuss Spain’s plans to bolster banking system. The Pair discussed progress Spain made on fiscal, structural reforms, Spanish govt’s plans to strengthen financial sector and support recovery and job creation, and broader challenges facing Europe, global economy, Treasury says in e-mail. The meeting was held at Treasury Dept.

Sorry, Europe, you are now doomed...