CRASH 2: Tell-tale signs continue to build among European banks.

Is this a job for the rutting chimpanzee?

Last week, The Slog posted about the clear signals that at least one bank – probably French – is already quietly on an emergency drip-feed from the European Central Bank (ECB) headed by Jean-Claude Trichet. As this last week has continued, Federal Bank employees in New York have become increasingly jittery about a backwash of contagion from the EU’s struggling financial institutions. All the markets are steady or up over the last 36 hours: it’s another mini-rally. It won’t last…especially once it finally dawns on the bourse traders that Ben Bernanke has nothing of any substance to say or offer at Jackson Hole tomorrow.

Today, signs of impending euro-disaster are everywhere.

In Germany, both the Bundesbank and the President have effectively accused the ECB of extending far beyond its legal role by buying up so much bond-junk (and lending to struggling banks) over the last week or so. Yesterday, a whopping €2.82 billion was borrowed by banks from the ECB’s emergency funding mechanism. That’s peanuts in a global context, but well over twice what one would normally expect.

The US banking mistrust we saw before the Lehman collapse of 2008 is now repeating here, ironically with the ECB taking in massive deposits from other banks….who don’t trust other banks…..probably because they know that those ‘others’ might be in even deeper poo than they are.

This week has also seen a pullback among the U.S. funds that would normally be important sources of liquidity for European lenders. And a growing number of all nationalities of lender are balking at lending money to banks for any longer than mere overnight.

Fitch Ratings this week said a survey of 10 large U.S. money-market funds found they have reduced their exposures to European banks by 9% in the past month – and by 20% since the end of May.

And last but not least – confirming The Slog’s long-held view of this bank – debt insurance costs for RBS have spiked to record levels.

We’re now at the point where the Big Double Whammy must kick in. It works like this:

* Long periods of denial about sovereign debt stability produce desperate bailouts anyway. (We’ve already done this bit)

* A stress test tries to fiddle the results so the banks look strong. The lending sector and markets see through it. (We’re past this bit too)

* The markets and credit suppliers lose all faith in dithering EU politicians, and lose trust in their statements. (And this bit)

* The sovereign debtors gradually run out of road and collapse, requiring more emergency funding. (One down, two or more to go)

* Suddenly, everyone in the world notices the exposure of major banks to the huge debtors. They avoid dealing with them. (We’re eight days into this one)

* In desperation, the central bank starts propping up those banks who are finding it tough to borrow money. (See last three paras above)

* EITHER some bad economic growth figures come in OR another sovereign fesses up to drowning OR the finances of a healthy creditor sovereign start to come under scrutiny as well. Bear in mind that the linkword for those factors can also be ‘AND’.  (We have all this happening all the time everywhere in the EU now)

*Things leak, and one or more banks get targeted as the numbers are correctly interpreted to show a bank in the mire. (We had this late last week, and then the US Fed reopened emergency FX lines. It’s still continuing).

* A run starts (alongside wholesalers treating them as lepers) on one or more banks. The central bank can’t cope, and the FX facilities start being plundered as never before. (This comes next)

* Wall Street spots this happening. Three sets of worries – banking share values, sovereign loss of banking credit lines, and US-held insurance liabilities – impact on the stock markets all at once. (This is next but one)

After that it gets unpredictable, because we don’t know how world leaders will respond. But we should assume for the sake of argument that the response will be too slow, knee-jerk eventually, and almost certainly lacking efficacy.

The person who has contributed more than most to this situation – by dilatory smugness, negligent control of French finances, and transparent attempts to sanitise the eurobank stress tests – is Christine Lagarde. She is the head of the IMF today.

The person whose intransigence on debt forgiveness, eurobonds and insistence on hair-shirt spending cuts in the ClubMeds was Angela Merkel. She was yesterday voted the most powerful female in Europe.

Every bond in Europe is beginning to look toxic. So, a left-field thought for you: one of the best financial brains on the planet is about to return to this mess. His name is Dominique Strauss-Kahn. I cannot believe this road to Hell in a handcart hasn’t occurred to him too. Who knows now what role he might end up playing?

20 thoughts on “CRASH 2: Tell-tale signs continue to build among European banks.

  1. So DSK has one of the best financial brains on the planet. Presumably, that’s different to the one he has in his trousers.


  2. What comes next after all that, is it that the global banking system seizes up, all trade halts and our fragile ‘just in time’ delivery system begins to break down?

    What then, massive money printing to unlock the system leading to a hyper-inflationary collapse later down the line? My modest stash of precious metals aren’t going anywhere, yet.


  3. How much longer will the German taxpayer put up with all this nonsense?The history of failed currency unions shows that the strong member(s) quit.


  4. If people would wake up and take a dictionary if needed to the phrase, socialised losses and privatised profits we might see enough unrest to get some sensible actions done. I don’t believe our political class have a clue what to do and instead rely on sound bites and spin to hoodwink everyone. I hope someday people realise just how far up the river they have been led.


  5. We could always ask Gordon Brown to rescue us all again, for a nice fat slug of taxpayers’ money, of course. We’d better be quick, though, before he offers!


  6. “The central bank can’t cope”
    See that always confuses me.

    Because inflation problems aside, my understanding was that Central Bank firepower is unlimited.
    The BoE can print enough to buy every damned thing on the planet, well, in the country anyway, its nothing to print £10trillion and buy every bank in the UK, every bond they have issued and shout “short that jimmy!”
    I can understand why they wont cope, because they are rather dim, but its a matter of will not capability, isnt it?

    Not quite asure I agree on DSK, he isnt an idiot, but he isnt a titan either, he was happy to waste the limited firepower the IMF had on doomed bailouts reliant on wage deflation and pixie dust.

    Ambrose hasnt mentioned the Baltic Dry Index in a while, thats generaly the “oh bugger, trades stopped”, actualy I’d forgotten how bad things actualy got back then, when people were seriously looking at 5 yr old container ships as scrap.

    Not long would be my guess. War Guilt is a weak arguement agaionst half the population, if you born in the 50’s, when West Germany was conscripting 6 divisons for NATO.
    But, I couldnt say if “not long” is 6 days 6 weeks or 6 years.
    I really do worry Germany is going to throw the iPigs off the cliff, and then realise that all its “savings” have been lent to them, and promptly tear itself apart.


  7. As the disenfranchised & disconnected grow exponentially it’s not unreasonable to expect greater social unrest — the unrestrained ‘shopping spree’ of recent days was maybe just a trial-run! It only requires minor realignments in the financial structures of many households to generate austerity — Add in the disparate factions such as NEET’s, the recently unemployed, plus abeyant university graduates — A depleted police force, nursing their own grievances, might not necessarily be the bulwark we’ve come to rely on.


  8. “…the unrestrained ‘shopping spree’ of recent days was maybe just a trial-run!”

    Which is almost certainly why the govt/police decided to act swiftly and harshly against the perps.


  9. “The BoE can print enough to buy every damned thing on the planet, well, in the country anyway, its nothing to print £10trillion and buy every bank in the UK, every bond they have issued and shout “short that jimmy!” ”

    If that started, would you expect civil unrest in hours, days or weeks?

    The level of printing so far and its consequent inflation is what they believe they can get away with.


  10. One of my children who lives and works in Beijing,says the cafe talk there is that America will default,and as china has $1.16 trillion of US debt that will cause problems but China will survive.He read that GDP growth for the third quarter will be a revised 9%.Oh we wish!!


  11. “All the markets are steady or up over the last 36 hours: it’s another mini-rally. It won’t last”

    Market Data

    Last Updated at 16:13FTSE 100 5121.57 Down -84.28 -1.62%
    Dax 5540.35 Down -140.73 -2.48%
    Cac 40 3113.83 Down -25.72 -0.82%
    Dow Jones 11190.23 Down -130.48 -1.15%
    Nasdaq 2430.58 Down -37.11 -1.50%
    BBC Global 30 5188.74 Down -32.06 -0.61%


  12. Pingback: CRASH 2: Slog prediction comes true within hours as Greek banks request emergency liquidity | The Slog

  13. Indeed – print £10 trillion and watch everybody on a fixed income and relying on savings have zero point zero zero zero one pence in their accounts.

    Tesco’s would go bankrupt over night as nobody could afford an out of season sprout let alone a bag of frozen ones !

    I guess we could set a new standard however and link the £ stirling to the value of a pea :)


  14. Well, hopefully some bankers/Investors/Gamblers will do the decent thing and jump from a great height onto a hard surface. Swiftly followed by CL’s yes men,all is well men. I believe now is not the time to take the moral high ground with DSK. If Fiscal Governance was based solely on sexual restraint, and CL alongside Ms Merkel, were to tell us of their abstinance. We would still be in this damned mess. This is seriously NOT the time to slap backs and help out friends and make deals on deals… This is F….. serious! And DSK will be of great use AND he should be at least offerd the job of Consultant… without the yes men on tow.

    I came across this interesting link ( sorry John not not related to this subject but to hackgate)


  15. Not at all-printing money (as in Weimar Germany) is self defeating because the public quickly refuse to accept it as currency. The government printed money is frantically swapped for goods leading to hyper-inflation.


  16. Pingback: BERNANKE SPEECH ANALYSIS: Systemic, academic, optimistic, pathetic . | The Slog

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