Banks deposit $534bn with the ECB a week after borrowing $645bn as eurozone crisis draws to a close
Posted on 28 December 2011 with 1 comment from readers
Banks in Europe are so worried about loaning to each other that they have a record $534 billion on deposit with the ECB earning 0.25 per cent, only a week after borrowing $645 billion from the same institution at one per cent. The 523 banks that borrowed this huge sum in an emergency program last week are therefore losing money on it.
Such staggeringly large holdings by the eurozone banks at the ECB is a mark of how serious the eurozone sovereign debt crisis has become with many expecting the first few months of 2012 to bring some kind of climax to the affair.
Bleak outlook
At the same time the global economy showed renewed signs of weakness with US house prices falling more than expected in 2011 and growing concerns about the outlook for the Chinese economy. All eyes are on the auction of $26 billion of Italian bonds today and tomorrow with yields perilously close to seven per cent.
It is the debt roll-overs of 2012 that pose the greatest danger to the global financial system. Mind-boggling sums of money need to be raised in bond markets. The natural market forces of bond markets propel interest rates upwards as demand for money increases. And as bond yields rise the value of existing bonds have to fall because they pay-out less than the newer issues.
Banks holding this paper, and the eurozone banks are massive holders of sovereign debt, then face losses. These losses will grow and grow until the banks start to fail.
The major event to watch for in early 2012 is indeed a bank failure, probably a large one and French. There have been rumors that this might have happened or is about to happen for some months.
Greek default
The other most likely thing to happen is a default by Greece. The negotiations with Greek bondholders have not been going well, and while this has been discussed for over a year a default by Greece and the contagion to other markets is still inevitable at some stage. It could come back to haunt us very suddenly.
That would then tip some eurozone banks over the edge and the policy response would doubtless be nationalization. But there is a massive disruption to the global financial system in this breakdown which is not planned for and the consequences are rather unknown like the Lehman bankruptcy in late 2008.
Bankers enjoying their New Year holiday this week are no doubt very much aware of this and that is why there is $534 billion on deposit at the ECB.
1 Comment posted by readers:
The US Federal Reserve is loaning money to the ECB which is loaning it to European banks. That is a bailout of Europe by the USA, something Ben Bernanke and Obama told Congress the US would not do. (Source: ‘The Federal Reserve’s Covert Bailout of Europe.” Wall Street Journal article, Dec. 28, by Gerald O’Driscoll.)
Told ya. Money printing is on the way.
How low will gold go before the real money printing starts to push it up, probably sometime next year? I wish I knew.
Iran will do nothing but talk to push their oil price up. I wish I had one of their cool speedboats. My little 14 foot aluminum boat is too slow to challenge the Fifth Fleet, especially since I don’t have a motor for it.
Maybe enough threats can get the oil pipeline from Canada built? Naw, too logical. I laugh every time I hear some ‘expert’ on CNBC, and elsewhere, say that the USA is awash in oil. It is scary how people believe whatever is said on TV. But for all your friends over there, Peter, they are right. We have so much oil over here, we don’t know what to do with it. But we have decided to keep importing a tiny amount from the Middle East so as to not disrupt the international oil market. WAIT, I think some is seeping up out of my back yard. I hate when that happens. Ruins the grass.
Brazilians are spending a fortune in Miami shopping and buying property, even thought they have to go through a tortuous process to get into the USA. They don’t have to worry about their kids getting kidnapped up here.