FacebookTwitterGoogle+RedditEmail

The Fear Gauge in the Eurozone

by MIKE WHITNEY

Funding fears, political gridlock and plunging stocks have pulled the eurozone deeper into crisis. On Friday, the gauges of market stress continued to widen signalling more turbulence in the days ahead. Libor –the rate at which London-based banks borrow from each other–increased for the eleventh straight day, while the Libor-OIS spread, (which indicates the reluctance of banks to lend to each other) soared to levels not seen since Lehman Brothers blew up in 2008. And the VIX–better known as the “fear gauge”–has been surging for more than a week.

What does it all mean?

It means the eurozone is in the throes of a vicious credit crunch, but its leaders are frozen in the headlights. That’s a recipe for disaster.

This is from a report by the ECB: “Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of EMU (Economic and Monetary Union) itself.” (“Warnings mount on euro crisis, credit crunch”, Reuters)

The risks of a disorderly breakup of the eurozone are now greater than ever. Greece is bankrupt and headed for default, but finance ministers can’t agree on a way to ringfence the teetering country to stop the contagion. Indecision and foot-dragging have roiled global equities and cleared the way for more carnage. Last week’s downgrades of two French banks have increased worries about the solvency of the EU banking system. This is from the Telegraph:

“The Bank for International Settlements has calculated that European banks have a $4 trillion “funding gap” – the shortfall between deposits and the long-term loans they have made and a concept that dominated the build up to the credit crunch. The IMF reckons European lenders are sitting on Eu300bn of credit risk.” (“Plan B: Flood the markets”, Telegraph)

Doubts about the EU banking system have sent the financials into freefall while the prospect of “cascading defaults” and deflationary pressures loom ever larger. Leaders will either have to be proactive or accept the consequences of their inaction.

For weeks, the news from Europe has been uniformly bleak. Italy was downgraded by Fitch ratings agency last Monday, while the Financial Times reported that “Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank…The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.”

The Siemens incident shows that confidence in French banks is beginning to wane creating doubts about the ECB’s ability to act as lender of last resort. Then there’s this from Reuters:

“A big market-making state bank in China’s onshore foreign exchange market has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, two sources told Reuters on Tuesday.

“Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped,” one source who is familiar with the matter told Reuters.” (“China bank stops FX swaps, forwards with some European banks”, Reuters)

And, this from Bloomberg:

“Lloyd’s of London, concerned European governments may be unable to support lenders in a worsening debt crisis, has pulled deposits in some peripheral economies as the European Central Bank provided dollars to one euro-area institution.

“There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with,” Luke Savage, finance director of the world’s oldest insurance market, said today in a phone interview. “If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.” (“Lloyd’s of London Pulls Deposits From European Banks as Confidence Withers”, Bloomberg)

Former U.K. Prime Minister Gordon Brown reiterated the claims of IMF chief Christine Lagarde that European banks are “grossly under-capitalized” and that the current debt crisis is more serious than the Lehman meltdown in ’08.

Late Thursday, the Financial Times reported hopeful news that EU officials were planning to recapitalize underwater banks. According to FT.Alphaville:

“European officials look set to speed up plans to recapitalise the 16 banks that came close to failing last summer’s pan-EU stress tests as part of a co-ordinated effort to reassure the markets about the strength of the 27-nation bloc’s banking sector.

A senior French official said the 16 banks regarded to be close to the threshold would now have to seek new funds immediately.” (“European bank recap recap”, FT Alphaville)

It sounds promising, but there’s one caveat. The sum that’s being discussed is too small to buffer the banks from a severe downturn. Thus, the story appears to be more public relations than a viable solution.

EU banks are also seeing the costs of dollar funding rise again. Despite the combined efforts of the Fed and other central banks, the growing likelihood of a Greek default has, once again, increased the price of swapping euros for dollars. The added expense puts more pressure on already-weak balance sheets at EU banks. This is from Pragmatic Capitalism:

“The ECB’s dollar program has also failed to halt the trend toward shunning European borrowers in the commercial paper market, a trader at a primary dealer in New York said.

European firms, particularly banks exposed to Greek debt, are stuck with only the shortest-term loans unless they’re willing to pay high premiums. (“Dollar funding costs rise”, Pragmatic Capitalism)

The Fed’s massive currency intervention fizzled less than 24 hours after the program was announced. That’s got to be a record.

So, conditions in the eurozone continue to deteriorate. Bond yields on sovereign debt continue to rise, money markets and commercial paper markets are under attack, insuring against default is getting more expensive, bank withdrawals are increasing, and interbank lending is grinding to a standstill. Even so, according to the UK Telegraph, EU officials have concocted a secret plan to recapitalise the banks and save the eurozone from disintegration. Here’s an excerpt from the article:

“European officials revealed they were working on a radical plan to boost their own bail-out fund, the European Financial Stability Facility (EFSF), from €440bn (£384bn) to around €3 trillion.

The plan to increase the EFSF firepower (note: through massive leverage) is the crucial part of a three-pronged strategy being designed by German and French authorities to stop the eurozone’s debt crisis spiralling out of control. It also includes a large-scale recapitalisation of European banks and a plan for an “orderly” Greek default….

The plan, which would aim to build a “firebreak” around the indebted eurozone countries, emerged at the IMF annual meeting in Washington where global leaders united to demand urgent action from European politicians.” (UK Telegraph)

Whether the plan is real or just wishful thinking is anyone’s guess, but, so far, there’s no sign that Germany has budged on any of the main issues. Merkel remains opposed to eurobonds”, opposed to blanket bailouts for countries that don’t meet their austerity targets, and opposed to a supra-national fiscal authority that can act as as the monetary union’s treasurer.

And even if the German Chancellor chose throw her weight behind the US proposal (Treasury Secretary Timothy Geithner wants to massively leverage the emergency fund to $2 trillion in order to create a de facto EuroTarp), she would face stiff resistance at home from adversaries at the Bundesbank (Germany’s central bank) and in the courts. In other words, Merkel’s hands are tied. The German parliament will support a larger emergency fund, but there will be no blank checks for banksters or unsterilized quantitative easing. (“monetization”)

As goes Germany, so goes the 17-member monetary union. But Germany is not following Wall Street’s script. They have their own ideas about these things. That’s good for working people but probably fatal for the eurozone.

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.

November 20, 2017
T.J. Coles
Doomsday Scenarios: the UK’s Hair-Raising Admissions About the Prospect of Nuclear War and Accident
Peter Linebaugh
On the 800th Anniversary of the Charter of the Forest
Patrick Bond
Zimbabwe Witnessing an Elite Transition as Economic Meltdown Looms
Sheldon Richman
Assertions, Facts and CNN
Ben Debney
Plebiscites: Why Stop at One?
LV Filson
Yemen’s Collective Starvation: Where Money Can’t Buy Food, Water or Medicine
Thomas Knapp
Impeachment Theater, 2017 Edition
Binoy Kampmark
Trump in Asia
Curtis FJ Doebbler
COP23: Truth Without Consequences?
Louisa Willcox
Obesity in Bears: Vital and Beautiful
Deborah James
E-Commerce and the WTO
Ann Garrison
Burundi Defies the Imperial Criminal Court: an Interview with John Philpot
Robert Koehler
Trapped in ‘a Man’s World’
Stephen Cooper
Wiping the Stain of Capital Punishment Clean
Weekend Edition
November 17, 2017
Friday - Sunday
Paul Street
Thank an Anti-War Veteran
Andrew Levine
What’s Wrong With Bible Thumpers Nowadays?
Jeffrey St. Clair - Alexander Cockburn
The CIA’s House of Horrors: the Abominable Dr. Gottlieb
Wendy Wolfson – Ken Levy
Why We Need to Take Animal Cruelty Much More Seriously
Mike Whitney
Brennan and Clapper: Elder Statesmen or Serial Fabricators?
David Rosen
Of Sex Abusers and Sex Offenders
Ryan LaMothe
A Christian Nation?
Dave Lindorff
Trump’s Finger on the Button: Why No President Should Have the Authority to Launch Nuclear Weapons
W. T. Whitney
A Bizarre US Pretext for Military Intrusion in South America
Deepak Tripathi
Sex, Lies and Incompetence: Britain’s Ruling Establishment in Crisis 
Howard Lisnoff
Who You’re Likely to Meet (and Not Meet) on a College Campus Today
Roy Morrison
Trump’s Excellent Asian Adventure
John W. Whitehead
Financial Tyranny
Ted Rall
How Society Makes Victimhood a No-Win Proposition
Jim Goodman
Stop Pretending the Estate Tax has Anything to do With Family Farmers
Thomas Klikauer
The Populism of Germany’s New Nazis
Murray Dobbin
Is Trudeau Ready for a Middle East war?
Jeiddy Martínez Armas
Firearm Democracy
Jill Richardson
Washington’s War on Poor Grad Students
Ralph Nader
The Rule of Power Over the Rule of Law
Justin O'Hagan
Capitalism Equals Peace?
Matthew Stevenson
Into Africa: From the Red Sea to Nairobi
Geoff Dutton
The Company We Sadly Keep
Evan Jones
The Censorship of Jacques Sapir, French Dissident
Linn Washington Jr.
Meek Moment Triggers Demands for Justice Reform
Gerry Brown
TPP, Indo Pacific, QUAD: What’s Next to Contain China’s Rise?
Robert Fisk
The Exile of Saad Hariri
Romana Rubeo - Ramzy Baroud
Anti-BDS Laws and Pro-Israeli Parliament: Zionist Hasbara is Winning in Italy
Robert J. Burrowes
Why are Police in the USA so Terrified?
Chuck Collins
Stop Talking About ‘Winners and Losers’ From Corporate Tax Cuts
Ron Jacobs
Private Property Does Not Equal Freedom
FacebookTwitterGoogle+RedditEmail