MF Global went bust for holding “risk-free” assets. True, it was basically caught out by a bet on spreads. But the brokerage’s collapse could have serious consequences for the eurozone, potentially undermining its latest survival plan.
That is because the “risk-free” assets are the sovereign bonds of the eurozone’s troubled periphery. Ask regulators whether that is risk-free, and they will suck their teeth and admit that, by some Basel standards, it is. Yet everyone knows that Greek government bonds are far riskier than German Bunds. In a court filing, MF Global appears to suggest that its bankruptcy was accelerated by pressure from US regulators. These include the Financial Industry Regulation Authority which, it alleges, demanded that it boost its capital and disclose a $6.3bn off-balance sheet holding of peripheral short-term debt in a repo-to-maturity trade. Whatever the reason, the US regulatory stance on peripheral debt should make eurozone policymakers sit up.
After all MF Global went bust for holding precisely the assets that the European financial stability facility is meant to be poised to vacuum up, research house Gavekal Dragonomics notes. And policymakers’ hopes that the EFSF will be part-funded by private sector investors may prove harder to realise. On Wednesday, a planned €3bn EFSF bond issue was pulled amid investor uncertainty.