Timebomb in Euroland: The Eurozone is Heading for a Crash.
by Mike Whitney
August 28, 2011
Bank funding costs are rising, liquidity is being choked off, and interbank lending has started to stall. A full-blown crisis can still be averted, but leaders will have to knuckle down and resolve the political issues fast. Otherwise the 17-member monetary union will fracture and the euro will be kaput. Here’s a clip from the Wall Street Journal:
“Commercial banks boosted their reliance on the European Central Bank, borrowing €2.82 billion ($4.07 billion) from an emergency lending facility on Tuesday … While the amount of borrowing is tiny … the increase from €555 million a day earlier, nonetheless suggest that some lenders are struggling to borrow from traditional funding sources.”(“Europe Banks Lean More on Emergency Funding”, Wall Street Journal)
Sure, it’s a pittance compared to the trillions floating around in the EU banking system, but the pattern is the same as it was in 2007 when the troubles began at French bank PNB Paribas. Back then, the problems seemed small, too, but things got out of hand quick. Over the following year, trillions in mortgage-backed securities (MBS) were downgraded forcing bigger and bigger losses on the bondholders, many of which were the nation’s largest banks. The bloodletting dragged on until September 2008, when Lehman blew up and the whole financial system went into cardiac arrest. The Fed had to rush to Wall Street’s rescue with $12 trillion in loans and other guarantees in hand just to keep the patient from croaking on the Emergency Room floor. Now it looks like history is repeating itself.
As the collateral the banks hold (mainly foreign sovereign bonds) continues to lose value, the banks will come under greater pressure making funding more costly and harder to get. In fact, the mad-scramble for short-term funding has already begun. Banks are hoarding capital just as they did after the Crash of ’08, depositing larger and larger amounts in overnight accounts with the ECB in order to avoid lending to the other banks. All of this is taking a toll on consumer and household lending which will inevitably push eurozone GDP further into the red. The negative feedback loop into the real economy will send unemployment higher while further crimping business investment. This is from Businessweek:
“Despite the ECB’s best efforts, some of Europe’s banks may be inching toward insolvency. The cost of insuring the bonds of 25 European banks and insurers set a record high on Aug. 24 of 257 basis points, higher than the 149 basis-point spike when Lehman Brothers collapsed in the fall of 2008, according to the Markit iTraxx Financial Index of credit default swaps.
The banks aren’t required to mark down most of their holdings of government debt to market prices. If they did, some would be forced to default or seek a bailout.” (“How Long Can the ECB Prop Up Europe’s Sick Banks?”, Businessweek)
Are you kidding me? The banks are sitting on a mountain of garbage paper and EU regulators haven’t even forced them to write down the losses. Is it any wonder why public confidence is at all-time lows?