Last week, the European Central Bank provided €489 billion ($US633 billion) in three-year loans to cash-strapped European banks, but figures released overnight show that European banks have turned around and deposited a record €452 billion with the ECB. This is stark evidence that the European interbank lending market remains crippled, and that banks would rather earn the meagre 0.25 per cent interest rate that the ECB pays on depots, rather than running the risk of lending to other banks at much higher interest rates.
Related from John Fund;
The 17 nations in the eurozone are now trapped between the unthinkable and the unsellable. Ending the euro is considered so radical a step that there are no backup plans for leaving it behind. But further integration of Europe’s economies is unpalatable because it would have to be sold to populations that, as the Washington Post put it, “were more skeptical about the Eurozone than their leaders to begin with, and have seen their worst fears realized.”
[ Since January, Canadian government and corporate bonds have returned 9.6 per cent, almost doubling the global average of 5.5 per cent. Much like last year, the thirst for these bonds, from both domestic and foreign buyers, stems from a relatively healthy Canadian economy. ]
Hopefully Canada (and perhaps the USA also after Nov elections) is beginning to, trying to firewall, decouple from hopeless Europe.
But what’s with Ontario ?
[ Earlier in December, ratings agency Moody’s Investors Service lowered Ontario’s outlook from ‘stable’ to ‘negative,’ following similar moves by S&P and DBRS Ltd.]
Oh, ya – McGuinty “green power”.
http://www.theglobeandmail.com/globe-investor/canadian-bonds-continue-to-shine/article2285555/
There was an article in the Wall Street Journal indicating that the U.S. Fed had quietly provided over $60B to the ECB without congresional approval. That ought to wake someone up.
[ Indeed, Greece has already gotten bailouts from the European Union and the IMF equal to $28,000 per Greek adult. Portugal and Ireland have received sums in the same neighborhood, but the debt-to-total-economy ratio of all three countries continues to grow, a sure sign that they are resisting real structural reforms.]
It is a case, pure and simple, of lifestyles that are maintained by borrowing, not by being productive. It is unsustainable and will come back to earth one way or another.
Productivity is key. The link between productivity and lifestyle was broken when barter transactions were replaced by currency.
Ever try to convince someone they should build you a house in return for some basket weaving? Fix their transmission in return for some performing-arts? Build them a windmill in return for some carbon credits?
In Europe and elsewhere too many financial resources go to the unproductive. It happens because taxpayers do not easily see the many ways Politicians waste our money. Same goes for NGOs, United Nations, IMF .
Another huge problem for Europe – declining or about to decline, populations.
How will it work when there are more Grandparents than grand children? Who will the elderly sell their pricey homes to when there are more sellers than buyers? At what price? Who will buy their equities? If there are fewer young people depositing into a pension plan than retirees withdrawing – how is all that going to work out?
Perhaps this is what the markets are already telling us about Europe. Perhaps this is what the markets have been saying about Japan for 15 years already. Japan’s population is now down three million from peak.
This didn’t just start yesterday……
Back during the 70’s, France was seeking to replace it’s venerable (early 50’s) AMX30 Main Battle Tanks but for various reasons rejected the British Chieftain, US M1 Abrams, the German LeopardII and the Isreali Merkava and opted to develop their own tank..the AMX56 Le Clerc..probably with an eye on export sales.
It worked……to a point…..An order for 400 from the United Arab Emirats helped finance the development…
The resulting vehicle, has all the cutting edge bells and whistles, notable performance and is well armed and armoured, with a reliable engine from Finnland…..except that the current cost is about 9.3 million Euros…resulting in France owning about 400+ units and the United Arab Emirats owning 390+.
This in a market saturated with late model used units, such as the LepardII’s, that Canada acquired, as well as entire fields of parked Russian builds……
Champagne tastes on a beer budget…..
What could go wrong?????
Its breaking up like the Mayan empire.
After fifteen years in England, and despite my love of motorcycles and good beer, the encroachment of the Eurocrat empire over Britain finally scared me back to Canada in 1999. Further developments there and here have all vindicated my decision to come home.
The first quote misses the point a bit. All banks will be required to meet the reserve and stability requirements of the Basel III agreement. This means they must increase their reserve ratios relative to their loan exposure. Funds on deposit with the ECB count as reserves. Loans to other banks do not.
The European banks doing this are doing exactly what they should be doing, strengthening their balance sheets. What it shows is that the 489 billion Euros is not near enough to fix the European fiscal crisis. The full number is about 3.5 trillion, and it’s been known for about two years.
The second quote is dead on. Ending the Euro means an immediate severe industrial depression in Germany as the new deutchesmark would skyrocket in value, along with depression and hyper-inflation in most of the marginal EU economies without the backstop of the German economy holding up currency values.
Retaining the Euro means turning over the management of all national economies over to Berlin, and to a much lesser extent Paris.
And for those following this slow-moving trainwreck, the next country joining the PIIGS will be Belgium. It’s finances are a disaster, and it hasn’t had a functioning national government in more than two years.
I am not sure what Europe is hoping to happen by replacing debt with ever more debt. I think a couple years of balanced budgets might lead to stability. It appears they are going to tank anyway so biting the bullet sooner will mean recovery sooner.
Scar, it makes a bit of difference if you replace bad debt with good debt. But one way or another these are just moves to allow the eventual writedown of bad debt, which is what recessions are all about.
Your point about budgets is entirely right. This is all futile if they don’t balance their budgets over a complete economic cycle.
Cgh: that 400+ billion was supposed to last a few months at least if I recall. Instead it was gobbled up in one week.
When and how big will the next tranch be?
A bottomless pit perhaps.
Gord, we know what the recapitalization amount is, as noted above. It’s always going to look bottomless until the EU stops messing around and puts up the full amount. The issue is not the amount. The issue is how much of it falls on German taxpayers and how much of it is taken in writedowns on sovereign bonds.
Euroland is collapsing under their socialist directed economies. As they go down the toilet they are bleating about the failure of capitalism to save them. Deep down they believe the USA can revisit the Marshall Plan and that all will be well. Little do they realize that the USA will be lucky to save themselves this time around.