FacebookTwitterRedditEmail

European Banks Still on the Brink

The EU banking system is in big trouble. That’s why European Central Bank (ECB) head Jean-Claude Trichet continues to purchase government bonds and provide “unlimited funds” for underwater banks. It’s an effort to prevent a financial system meltdown that could wipe out bondholders and plunge the economy back into recession.

“We have the best track record on price stability over 11 1/2 years in Europe and among the legacy currencies,” Trichet recently boasted. “What we have done and what we do with the same purpose is to help restore an appropriate functioning of the monetary-policy transmission mechanism.”

Nonsense. EU banks and other financial institutions are presently holding more than 2 trillion euros of public and private debt from Greece, Spain and Portugal. All three countries are in deep distress and face sharp downgrades on their sovereign debt. The potential losses put large parts of the EU banking system at risk. Trichet knows this, which is why he continues to support the teetering system with “unlimited funds”. It has nothing to do with restoring the “functioning of the monetary-policy transmission mechanism”. That’s deliberately misleading. It is a straightforward bailout of the banks.

Imagine that you are deeply in debt, but the bank offers to lend you as much money as you need to keep you from bankruptcy. To help maintain appearances, the bank agrees to accept the worthless junk you’ve collected in your attic in exchange for multi-million dollar loans. Does the bank’s participation in this charade mean that you are not really broke after all? Does it increase the value of the garbage collateral you’ve exchanged for cash?

The ECB is providing billions of euros per week to maintain the illusion that the market is wrong about the true value of the bonds. But the market is not wrong, the ECB is wrong. The value of Greek bonds (for example) has dropped precipitously. They are worth less, which means the banks need to take a haircut and write down the losses. More liquidity merely hides the problem.

This is from Reuters:

“Despite the open-arms approach, outstanding ECB lending has fallen more than a third since the start of July to 592 billion euros…. Liquidity remains abundant though. Over 120 billion euros was deposited back at the ECB overnight, the latest figures show.”

So, overnight deposits are increasing because the wholesale funding market is on the fritz, while–at the same time–the ECB has had to lend more than half a trillion euros to stabilize the under-capitalized banking system. This is progress? It’s a farce.

Interbank lending has been falling, but bond yields in the distressed countries continue to rise. That means there’s more trouble ahead. It also means Trichet’s plan is not working. Time for another bailout.

Trichet has kept the ECB’s benchmark lending rate at rock bottom (1 per cent) for 17 months, depriving savers of desperately needed interest income. The policy is designed to increase the yield-curve so the banks can make more money. The low interest rates are not passed on to workers or households (who still pay 18 per cent on their credit cards), but to banks that borrow money at nearly-zero rates. It’s another giveaway. The policy curtails spending and depresses demand. When savers slash spending, GDP shrinks, and the economy goes into recession. The real economy is being savaged to help the banks pull themselves out of the red.

Trichet has recently joined the Austerians in calling for more belt tightening. Here’s a quote:

“With hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: “stimulate”, “activate”, “spend”! … there is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now.”

Sure, austerity for workers and welfare for the banks. If Trichet is really worried about fiscal deterioration, he should stop diverting capital into broken institutions. He should force the banks to seek funding in the markets and stop using the ECB as a crutch. That’s how the system is supposed to work.

This is from Calculated Risk:

“Was there much sovereign stress in the European bank stress tests?

No…The haircuts are applied to the trading book portfolios only, as no default assumption was considered, which would be required to apply haircuts to the held to maturity sovereign debt in the banking book.” (Calculated Risk)

The stress tests were a fraud. The sovereign debt (bonds) have already slipped in value, but the losses remain concealed behind a wall of ECB liquidity. This is a very nontransparent and corrupt system.

MIKE WHITNEY lives in Washington state. He can be reached at fergiewhitney@msn.com

More articles by:

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

March 20, 2019
Elliot Sperber
Empedocles and You and Me 
March 19, 2019
Paul Street
Socialism Curiously Trumps Fascism in U.S. Political Threat Reporting
Jonah Raskin
Guy Standing on Anxiety, Anger and Alienation: an Interview About “The Precariat”
Patrick Cockburn
The Brutal Legacy of Bloody Sunday is a Powerful Warning to Those Hoping to Save Brexit
Robert Fisk
Turning Algeria Into a Necrocracy
John Steppling
Day of Wrath
Robin Philpot
Truth, Freedom and Peace Will Prevail in Rwanda
Victor Grossman
Women Marchers and Absentees
Binoy Kampmark
The Dangers of Values: Brenton Tarrant, Fraser Anning and the Christchurch Shootings
Jeff Sher
Let Big Pharma Build the Wall
Jimmy Centeno
Venezuela Beneath the Skin of Imperialism
Jeffrey Sommers – Christopher Fons
Scott Walker’s Failure, Progressive Wisconsin’s Win: Milwaukee’s 2020 Democratic Party Convention
Steve Early
Time for Change at NewsGuild?
March 18, 2019
Scott Poynting
Terrorism Has No Religion
Ipek S. Burnett
Black Lives on Trial
John Feffer
The World’s Most Dangerous Divide
Paul Cochrane
On the Ground in Venezuela vs. the Media Spectacle
Dean Baker
The Fed and the 3.8 Percent Unemployment Rate
Thomas Knapp
Social Media Companies “Struggle” to Help Censors Keep us in the Dark
Binoy Kampmark
Death in New Zealand: The Christchurch Shootings
Mark Weisbrot
The Reality Behind Trump’s Venezuela Regime Change Coalition
Weekend Edition
March 15, 2019
Friday - Sunday
Andrew Levine
Is Ilhan Omar Wrong…About Anything?
Kenn Orphan
Grieving in the Anthropocene
Jeffrey Kaye
On the Death of Guantanamo Detainee 10028
Stan Cox – Paul Cox
In Salinas, Puerto Rico, Vulnerable Americans Are Still Trapped in the Ruins Left by Hurricane Maria
Ben Debney
Christchurch, the White Victim Complex and Savage Capitalism
Eric Draitser
Did Dallas Police and Local Media Collude to Cover Up Terrorist Threats against Journalist Barrett Brown?
Jeffrey St. Clair
Roaming Charges: Straighten Up and Fly Right
Jack Rasmus
Trump’s $34 Trillion Deficit and Debt Bomb
David Rosen
America’s Puppet: Meet Juan Guaidó
Jason Hirthler
Annexing the Stars: Walcott, Rhodes, and Venezuela
Samantha M. - Angelica Perkins
Our Green New Deal
Mel Gurtov
Trump’s Nightmare Budget
Steven Colatrella
The 18th Brumaire of Just About Everybody: the Rise of Authoritarian Strongmen and How to Prevent and Reverse It
Evaggelos Vallianatos
Riding the Wild Bull of Nuclear Power
Michael K. Smith
Thirty Years Gone: Remembering “Cactus Ed”
Dean Baker
In Praise of Budget Deficits
Howard Lisnoff
Want Your Kids to Make it Big in the World of Elite Education in the U.S.?
Brian Cloughley
Trump’s Foreign Policy is Based on Confrontation and Malevolence
John W. Whitehead
Pity the Nation: War Spending is Bankrupting America
Priti Gulati Cox
“Maria! Maria! It Was Maria That Destroyed Us!” The Human Story
Missy Comley Beattie
On Our Knees
Mike Garrity – Carole King
A Landscape Lewis and Clark Would Recognize is Under Threat
Robert Fantina
The Media-Created Front Runners
Tom Clifford
Bloody Sunday and the Charging of Soldier F
FacebookTwitterRedditEmail