Here are some other reasons to consider the creaming of the Euro. Things are VERY VERY bad in the EuroZone. Governments are going to be forced to give even more to Europe’s zombie big banks.
Happy new Year all!
SOURCE: link is at the end.
The European big banks are in even deeper doodoo than their U.S. counterparts. Gordon T. Long, in a report called Collateral Contagion, lifts a hitherto little known part of the veil:
There are approximately $55 trillion of banking assets in the EU. This compares to only $13 trillion in the US. Bank assets in the EU are 4 times as large as in the US.
In the US, debt held by the bank is smaller because retail deposits are a primary source of funds. EU banks use wholesale lending and, as a consequence, the debt held by banks is close to 80% versus less than 20% by US banks.
Wholesale bank lending in the EU approximates $30 trillion versus only $3 trillion in the US, a 10 X differential.
Wholesale lending is fundamentally borrowing from money market funds and other very short term, unsecured instruments. The banks borrow short and lend long. It all works until short term money gets scarce or expensive.
Both have occurred in the EU and this recently placed Dexia into bankruptcy, forcing it to be taken over by the Belgian and French governments. The unsecured bond market fundamentally closed in the EU in Q3 2011, as fears mounted that an EU solution was not forthcoming.
Assuming $30 trillion of loans is spread over three years, EU banks have a requirement for $800 billion a month of rollover financing for wholesale lending outstanding.
Ilargi: If those numbers don’t render you speechless, please read them again. $800 billion a month of rollover financing, every single month for three years.
The ECB recently passed out €489 in three-year loans at 1%. Nobody was impressed for more than a few hours. Gordon T. Long’s report reveals at least a part of the reason why. Moreover, the ECB is now accepting the proverbial toilet paper as collateral for the loans, but guess what, banks are running out of toilet paper! David Enrich and Sara Schaefer Muñoz touch on the same topic for the Wall Street Journal:
Europe’s Banks Face Pressure on Collateral
Even after the European Central Bank doled out nearly half a trillion euros of loans to cash-strapped banks last week, fears about potential financial problems are still stalking the sector. One big reason: concerns about collateral.
The only way European banks can now convince anyone—institutional investors, fellow banks or the ECB—to lend them money is if they pledge high-quality assets as collateral.
Now some regulators and bankers are becoming nervous that some lenders’ supplies of such assets, which include European government bonds and investment-grade non-government debt, are running low.
If banks exhaust their stockpiles of assets that are eligible to serve as collateral, they could encounter liquidity problems. That is what happened this past fall to Franco-Belgian lender Dexia SA, which ran out of money and required a government bailout.
“Over time it is certainly a risk,” said Graham Neilson, chief investment strategist for Cairn Capital Ltd. in London. “If banks don’t have assets good enough to pledge as collateral, they will not be able to tap as much liquidity…and this could be the end-game path for a weaker bank.”
Ilargi: The market for unsecured bonds issued by banks is dead. And they no longer have any collateral left to issue secured bonds. So what will they do?
Saw this Guardian headline yesterday: “Liquidity crunch fears stalk markets.” I’d say that should have read “Solvency crunch fears stalk markets.” The ECB has taken care of short term liquidity. But to no avail.
Collateral equals solvency. The ECB loans equal liquidity. And liquidity means nothing if you’re insolvent. Inevitably, banks will start to fall by the wayside. Even some of the Too-Big-To-Fail ones.