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?