Global economic collapse: the unfortunate day the brakes finally fail

Sunday, December 11, 2011
By Paul Martin
December 11, 2011

LONDON – The Telegraph sounded alarm bells late Friday that the Eurozone banking system is on the edge of collapse. Specifically, the problem is related to a lack of acceptable collateral, or ‘collateral crunch’, for overnight and other short-term bank funding (emphasis added): Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding. The European Central Bank admitted it had held meetings about providing emergency funding to the region’s struggling banks, however City figures said a ‘collateral crunch’ was looming. “If anyone thinks things are getting better then they simply don’t understand how severe the problems are. I think a major bank could fail within weeks,” said one London-based executive at a major global bank. Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as U.S. Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding. Izabella Kaminska at FT Alphaville wrote about this story early and has covered it well. She wrote that the problem is becoming so acute that even the Bundesbank is running out of money. While policy is decided centrally, actual enforcement and implementation of that policy is conducted on a national central bank (NCB) level. Generally speaking, the system ensures that all NCBs carrying surpluses channel them over to NCBs carrying deficits. The problem is that since the crisis unfolded, the number of NCBs handling deficits has started to outnumber the number of NCBs holding surpluses. One particular NCB — the Bundesbank — has become a sort of lender of last resort for the whole Eurobanking system. –Seeking Alpha emphasis italicics

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