It is very important right now for the EU and the ECB to have the world’s markets believe that Europe’s banks are NOT, repeat NOT weak, in debt, or in any danger of not being able to fund their day to day operations. Very important.
In the last few days doubts about the health of Euro banks have been growing. Suddenly, this morning, everything is absolutely fine. Better than fine. Peachy in fact. Shares and markets are up across Europe. Not, I think that they will stay that way. But that’s just grumpy old me.
So what happened? Well, I think the ECB has tried to fool the markets. And they may have succeeded for a few days even a week or so. Here’s my reading of what happened.
First, signs were bad. A couple of days ago the ECB failed to get Europe’s banks to take down the full amount the ECB had put up to bidders in a repo auction. The latest auction in what the ECB described as its ‘sterlization’ programme. The sterilization programme is designed to withdraw cash from the banks to off-set what the ECB is spending on buying up EU bank and Soverign debts/bonds. The ECB needs to do this to keep the markets convinced that the bond buying isn’t being funded by QE.
Each of the last three auctions has attracted a lower bid than the previous. This last one failed to sell the fulll amount. What did this mean? Well, rather straightforwardly it means the European banks did not want, or felt they could not, afford to part with the cash. They needed it.
Why would they need it? It has been no secret that inter-bank lending in Europe has been very difficult. Few will lend and those that will, charge a lot and won’t lend to those who need it most – Greece and friends.
Luckily this episode didn’t get much attention. But what came next did. The ECB is approaching the end of its year long LTRO. This means the 442 Billion Euros it has lent to Europe’s banks over the last year is all due to be repaid on Thursay. That is a lot of cash to withdraw. Would the banks who had not turned up for the repo auction survive when 442 billion was withdrawn?
As these questions started to get a lot of attention. Everyone was beginning to panic about the end of the LTRO. Next thing we know we suddenly heard the ECB had extended or newly created agreed to a whole raft of individual loan, bank guarantee and re-capiatlization agreements.
Actually this news got even less attention than the repo auction had. So no one seemd to pay much attention, certainly not in the english language press. But in those countries affected the news was that Ireland Spain and Denmark’s bank guarentee funds, that were due to expire this week, were all extended. Sweden, Latvia, Austria and some banks in Germany already have them (Think perhaps, Commerz and BeyernLB). The EU was also ‘considering’ extensions of guarentees for the Netherlands, Poland and Slovenia as well. Greece and Poland were given a guarentee and a recapitalization fund. And even Hungary was given a ‘liquidity’ scheme to stop its banks from impending closure. But as I say, no one much in UK and the US markets, at least, seemed to notice.
Everyone was busy getting more and more panicked about the end of the LTRO. As the day wore on shares generally and bank shares in particular, dropped across Europe and the Spanish banks especially had a hissy fit as they watched 6% of the share value evaporate.
So no one much seemd to notice all the country be country extensions to old funding agreements and creation of new ones. All Mainstram Finanical media attention seemed to be focused on guessing how much the ECB would put back into the Euro zone banking system via whatever shorter term loan operation was going to replace the LTRO.
Opinion was divided over whether it would be a disaster if very little was put back – because that would mean the banks would all go bankrupt. Or if it was worse if they put a lot back, because this would mean the European banks must be in terrible shape. What was a banker to do?
So finally, this morning, the ECB also revealed that it had lent out only 132 Billion Euros for six months. Shares inmmediately jumped up in Frankfurt and Paris on this news which was reported as, ” Liquidity-related fears about the health of Europe’s financial sector eased…” (MarketWatch). The relief was due to the fact that only 171 banks asked for a loan and all togehter the 132 Billion asked for was lower than the 2-3 hundred billion the markets had aparently expected.
This news seemd to many to just confirm the results of the offical bank stress tests, which had already declared how robustly healthy Spanish banks and Commerz Banc and BeyernLB all are.
What has received less attention is the fact that the loans are at 1% interest. That is quite expensive. The inter-bank rate at the moment in Europe, for those who can get it of course, is about 0.75%. So the ECB’s offer isn’t terrbily attractive unless you are desperate of course.
What to make of all these gyrations? To me it says the ECB acted to shore up a great many of the less, in-the-news, shakey banks in Ireland, Hungary etc which meant that this morning with the eyes of the markets glued to the new short term lending offer, there was much less of a queue. I am sure Greece and Spain were there. But many others who would have been jostling for a hand-out in the glare of lights, had been dealt with earlier by other means. They will need to come for more lending from the short term facility, for sure. BUT not today. Not when the markets were paying attention.
I think it is quite possible we may see another shorter term, say 3 month duration, being announed. But not today, not while people are paying attention. In a few weeks time.
All in all a clever piece of news mangement or market fooling, depending on who you see it.
What bothers me, IF I am correct about all this, is how easily the markets are fooled.
Will they stay fooled? I don’t think so. This sort of deft footwork only buys time. It diffuses a crisis of bad news on a given day. It does nothing at all to address the underlying problems.
The banks are still insolvent. Still unwilling to lend to each other or to anyone else for that matter. Nations are still going bankrupt trying to bail out their banks. And we are all still, I think, headed for a very major waterfall event and another insane bail out effort of epic size, to try to cover it over.