ECB’s Draghi….’has a nose for this kind of thing’
Dilemma for ‘more flexible’ ECB as borrowing eurobanks accused of accounting ploys
Although the European Central Bank’s new Chief Mario Draghi today signalled a ‘more flexible’ approach to the eurozone crisis, sources close to joint bailout operations in the eurozone say the Italian is privately “highly concerned” about several of the underhand machinations going on among the weaker eurobanks. These moves are aimed at maintaining access to ECB funding as the Ezone crisis escalates. And Draghi is already attracting the suspicion of the ECB’s German faction.
Fraudulent swapping of assets, cleverly misreported funds levels – and what one source described as “harebrained risk” – are just three of the myriad methods being employed by weaker banks in Europe to stay in the ECB’s good books, senior credit sources told The Slog last night and this morning.
“We are already acutely aware of the 2008 syndrome,” an insider said, “as trust between banks fails, and more and more financial houses choose to park money at the ECB rather than lend to each other”. He was referring to identical signs in the US, prior to the Lehman collapse three years ago, which began to ring klaxons about weaker institutions becoming ‘no-lend zones’. But it seems Draghi has been most alarmed, since assuming his new post two weeks ago, at what appears to be accountancy jiggery-pokery – designed purely to enable wobbly banks to retain access to ECB funds.
“There’s a whole mountain of dissembling in play out there,” said a senior sovereign credit manager, “and while [the ECB] is aware of it, the concern is that this kind of desperation stuff usually precedes much worse news.”
The ‘stuff’ being referred to includes banks borrowing very short-term – from dubious sources at usurious rates – in order to present an apparent scene of health to justify further ECB loans….and then playing a terrifying payback game between Peter and Paul to keep the show on the road. Other more common tactics include equally strapped (but relatively friendly) banks swapping assets – to then show them in the accounts for the same reason. Commenting on this latter game, a London-based investment banker told The Slog, “This is crazy time. But it’s also very bad news indeed, because to open up to another bank – however close you might be to them – and for them to agree….these must be two absolutely desperate institutions. It’s fraud, pure and simple.”
One source speculated that Mario Draghi’s predecessor had turned a blind eye to these practices. But the primary focus was on Draghi’s reaction to the practices.
“Mario Draghi is exceptionally acute, and totally discreet,” observed a former colleague, “He has a unique nose for this kind of thing, whereas, you know – maybe Trichet was just a little less worldly. But for these rumours to be around, well, you have to think that others [apart from him] know about it. In my opinion, Mario would never brief about that sort of behaviour”.
Signor Draghi is very keen to ensure that ‘funny money’ isn’t seen to be leaking out of the ECB in the guise of other things – and thus leave him open to charges of eurozone bailout by stealth from powerful German opinion-leaders. Earlier today, the ECB boss signalled that he would display ‘more flexibility’ in reducing eurozone borrowing costs. This is already striking fear into the central bank’s German axis.
The developments are interesting, because earlier this week German central bank boss Lens Weidmann told the FT bluntly that central-bank support for government finances would be illegal, transgressing EU treaties banning the direct financing of states.
My nose tells me that, perhaps, Weidmann had ECB ‘flexibility’ in mind when he made the remarks to the Financial Times. We shall see.
The Slog 