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Friday, 23 December 2011

Is your European taxpayer's money used to enable carry-trades? The ECB lends €489bn in low-interest loans to European banks.

You got the most
But nobody loves you
Nobody has to
Just because

One of the nasty consequences of the enduring, unsolved European debt crisis is that banks don’t trust each other anymore… at all. There is continuous uncertainty on the general quality of bank’s assets and no bank is able to break through this stalemate.

Especially the amount of sovereign bonds from and exposure to the PIIGS countries that the European banks have and the fact that none of these banks gives full disclosure on this, makes that the credit exchange between banks has dried up almost totally. And the enduring failure of the European governments to truly solve the European debt crisis makes that debt from the other ‘safer’ Euro-countries also becomes more and more suspicious. This is the explosive recipe for a total dead-lock of the European interbancary capital exchange.

The largest banks in general still find ways to collect new credit to roll over matured loans, but for the smaller banks the roads to the wholesale capital markets and the stock exchanges are closed down currently. The only remaining source for money – outside the central banks – are the private 
savers and corporate depositors. This is especially a favorable development for private savers; they finally start to receive a decent interest on their savings that compensates inflation and perhaps yields them a little bit more money. Deposits with maturities of 6-12 months now yield an interest of 3%-3.5% at small banks.

While this is good news for the savers, it makes rolling over matured debt much more expensive for the banks. On top of that, the return on investment (ROI) for invested money is currently much lower as the banks have to keep higher capital ratios, due to (a.o.) the Basel III capital and liquidity demands.

Therefore the ECB decided to step in the void; via a special credit window it supplied loans to banks that had nowhere else to go at the time, against only 1% interest. And also to other, less cash-strapped banks, hoping that this would unlock the wholesale capital markets again. Yesterday, the ECB reported that this special credit window has been such a success that an enormous €489 bln in loans had been supplied. The Financial Times writes about this:


Demand for ECB loans rises to €489bn

The European Central Bank has stepped up its response to the eurozone crisis by providing €489bn in unprecedented three-year loans to more than 500 banks across the region.

The stronger-than-expected demand, a record for the amount allocated in a single ECB liquidity operation, came after banks were urged by policymakers to take the funds as part of a concerted effort to ease severe strains across the financial system.

The offer of unlimited three year loans, announced this month, comes ahead of a crucial first quarter of 2012 for the eurozone when a large volume of bank and government debt is due for refinancing.

The outcome was initially cheered by markets, with the euro and equities surging on hopes it would help ease banks’ stretched balance sheets, but enthusiasm later waned.

Sebastien Galy, senior currency strategist at Société Générale, said the operation had provided “a sugar-rush” in financing support for banks. But it “does not, of course, resolve the deep-seated issues facing Europe”.

Markets have been debating whether the banks will use the cheap loans to buy higher yielding government debt in a classic “carry trade” rather than finance existing assets. Banks used about half the €442bn allocated in one year loans in June 2009 to buy higher-yielding sovereign debt, mostly Greek and Spanish government bonds.

The ECB has sought to reduce banks’ funding difficulties in the hope of averting a dangerous “credit crunch” that would drive the eurozone into a deep recession.
But some ECB policymakers have gone further, urging banks to use the funds to support struggling eurozone government bond markets.

The ECB gave no details but analysts said demand for the loans was likely to have been heaviest from the crisis-hit peripheral countries. In Madrid, bankers said take-up by Spanish banks was likely to have been substantial. “If everyone does it, the stigma goes away,” said one, referring to the reputational risks previously associated with accessing ECB liquidity.

There is so much resemblance between drugs users and the European banks, that it is simply astonishing. Especially, when you look at the ECB as being in the role of drugs dealer. Sebastien Galy admits it straightforwardly in the first red block: the financial drug gives us a rush, but it doesn’t solve our problems, of course.

What’s then the difference between a heroin user and a European bank?! Both use the drug to escape from reality! And instead of helping the users to get rid of these financial drugs, drugs dealer ECB administers more. If you don’t agree with this thesis, please read the third red block: ‘demand for the loans was likely to have been heaviest from the crisis-hit peripheral countries’.

That makes sense: the PIIGS-countries were the places where the heaviest financial drug addicts have been residing. And the ECB gave them another shot by handing out more low-interest loans!

Finally, one remark on the second red block: if my tax-money is wasted in order to enable lucrative carry-trades for large banks in Europe, then I want it back. It is neither my task nor duty to enable a new and risky business model for the banks. If you agree with me, please send a line to I will forward those mails to the Dutch national bank DNB.

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