Monday, February 21, 2022

"The eurozone’s banking instability" (A euro catastrophe could collapse it)

This piece is an odd combination of a meandering introduction and a meaty bit of....ummm, hold up, that could be the descriptor of our own little blog. Let's try that again:
An incisive look at...

From GoldMoney (skipping past the meaty middle), January 13:

This article looks at the situation in the euro system in the context of rising interest rates. Central to the problem is role of the ECB, which through monetary inflation embarked on a policy of transferring wealth from fiscally responsible member states to the spendthrift PIGS and France. The consequences of these policies are that the spendthrifts are now ensnared in irreversible debt traps.

Even in a Keynesian context, the ECB’s monetary policy is no longer to stimulate the economy but to keep the spendthrifts afloat. The situation has deteriorated so that Eurozone commercial banks appear to have credit restricted in New York, evidenced by the reluctance of the US banks to enter into repo transactions with them, leading to the market failure in September 2019 when the Fed had to intervene.

An examination of the numbers strongly suggests that even Eurozone banks, insurance companies and pension funds are no longer net buyers of Eurozone government debt. It could be because the terms are unattractive. But if that is the case it is an indictment of the ECB’s asset purchase programmes deliberately suppressing rates to the point where they are unattractive, even to normally compliant investors.

Consequently, without any savings offsets, the ECB has gone full Rudolf Havenstein, and is following similar inflationary policies to those that impoverished Germany’s middle classes and starved its labourers and the elderly in 1920-1923. That the German people are tolerating such an obvious destruction of their currency for the third time in a hundred years is simply astounding.....
*****  
.....Conclusion

Rising interest rates globally will affect all major currencies, and for some of them expose systemic risks. An examination of the existing situation and how higher interest rates will affect it points to the Eurozone as being the most likely global weak spot.

The Eurozone’s debt position pitches the entire global financial and economic system further towards a debt crisis than generally realised. Particularly for Greece, Italy, France, Belgium, Portugal, and Spain in that order of indebtedness, the problem is most acute. They only survive because the ECB ensures they can pay their bills by funding them totally through inflation of the quantity of euros in circulation. The ECB’s entire purpose has become to transfer wealth from the more fiscally prudent member states to the spendthrifts by debasing the currency.

In the process, based on figures provided by the Bank for International Settlements the banking system is contracting credit to the private sector, and it is not even accumulating government bonds, which is a surprise.  Much like banks in the US, Eurozone banks have become increasingly distracted into financial activities and speculation. The difference is the high level of operational gearing, up to thirty times in the case of one major French bank, while most of the US’s G-SIBs are geared about 11 times on average.

This article points to these disparities between US and EU banking risks having been a factor in the US repo market failure in September 2019. And we can assume that the Americans remain wary of counterparty exposure to Eurozone banks to this day.

That the ECB is funding net government borrowing in its entirety indicates that even investing institutions such as pension funds and insurance companies, along with the banks are sitting on their hands with respect to government debt. It means that savings are not offsetting the inflationary effects of government bond issues. It represents a vote to stay out of what has become a highly troubling and inflationary situation. The question arises as to how long this extraordinary situation can continue.

It must come to an end some time, and by destabilising a highly leveraged banking system the end will be a crisis. With its GDP being similar in size to China’s (which is seeing a more traditional property crisis unfolding at the same time) a banking crisis in the Eurozone could be the trigger for dominoes falling everywhere......

....MUCH MORE