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The Big Fire Sale

EuroZone Deathwatch

by MIKE WHITNEY

There’s no way to overstate the calamity that’s unfolding across the Atlantic. The eurozone is imploding. The smart money has already fled EU banks for safe quarters in the US while political leaders frantically look for a way to prevent a seemingly-unavoidable meltdown. Here’s an excerpt from a post at The Streetlight blog that explains what’s going on:

“…ECB data seems to indicate that monetary financial institutions (MFIs) in Europe have been moving their deposits out of European banks. Where is that money going?….

European banks are shifting their cash assets out of European banks and putting much of them into US banks…. This has happened at a significant rate, with a net transatlantic flow from European to US banks that probably totals close to half a trillion dollars in just six months.”

(“Europe’s Banking System: The Transatlantic Cash Flow”, The Streetlight blog)

The eurozone is experiencing a slow-motion run on its banking system. And–while the ECB’s emergency loans and other commitments have kept the panic from spreading to households and other retail customers–the big money continues to flee as leaders of large financial institutions realize that a political solution to the monetary union’s troubles is still out-of-reach.

The spreads on Spanish and Italian sovereign bonds have risen to nosebleed levels while the interest rate on the Greek 1-year bond has topped 70 percent, a tacit admission that Greece has lost access to the capital markets and will default despite the persistent efforts of the IMF and ECB.

At the same time, overnight deposits at the European Central Bank (ECB) continue to rise as jittery bankers stash billions at the “risk free” facility. According to the Wall Street Journal: “Banks deposited €166.85 billion ($235.23 billion) at the ECB, the central bank said Tuesday, up from the previous 2011 peak of €151.1 billion recorded Friday, and the highest since €172.09 billion recorded Aug. 9 2010.” This is yet another sign that nerves are on-edge and that banks are preparing for the worst.

German Chancellor Angela Merkel has been stalled in her attempt to push through changes to the European Financial Security Facility (EFSF) that would allow it’s governors to use billions in emergency funds to bail out underwater EU banks that made bad bets on sovereign bonds. The German parliament (Bundestag) will vote on the issue on September 23 with the future of the 17-member monetary union hanging in the balance. If the EFSF is not given the “expanded powers” it seeks, then investors will ditch their bank shares and the markets will plunge. Political developments in Germany will determine whether the eurozone has a future or not.

This is from Reuters:

“Funding market tensions have triggered emergency measures at European banks, with some firms now dumping assets at the fastest rate since the collapse of Lehman Brothers as they seek to build up stockpiles of cash and reduce their reliance on short-term borrowings.

Nervy lenders have sold off billions of euros of “good assets” since the start of August, according to treasurers and business heads overseeing such sales, with some firms also halting new loans to large corporate clients in an effort to preserve cash.

Such a defensive response to the enfolding funding crisis in Europe is the clearest sign yet that credit market tensions – whether rooted in truth or unwarranted investor panic – pose an increasing threat to the global economic recovery, potentially choking off credit to critical engines of growth.” (“Banks dump assets as funding worries intensify”, Reuters)

It’s a firesale, and it’s getting worse. The banks have already jettisoned their good assets and are now left with the toxic dreck that will fetch only a fraction of their original cost. As the bank run accelerates, the need for cash will increase forcing the ECB to either dig deeper or let the financial system crash.

EU leaders have frittered away an entire year while sparks on the periphery turned into full-blown firestorm. Now the inferno has spread to the core and policymakers still can’t settle on a course of action. This is policy paralysis at its worst.

The problem is political not economic. Eurozone leaders are being asked to create a fiscal union with powers that surpass those of the individual states, a United States of Europe. But the groundwork has not been done to engage the public or build consensus, which is why the ECB continues to rely on half-measures and band-aid solutions like emergency loans and bond purchasing programs. Now investors have seen through the ruse and are demanding swift action or they’ll send the markets into freefall. So, time is of the essence, which is why the eurozone’s chances for survival are so slim.

Mike Whitney lives in Washington state. He can be reached atfergiewhitney@msn.net