Here is a thought for you – I wonder if the flash point in Europe will come not from the Euro but the dollar? Or at least if the Dollar denominated debt is going to be as much of a problem for European banks as the EUro denominated debts? I think it could.
Here’s why.
Many European banks, UK and German one’s in particular have dollar denominated debts and assets. Both are losing value. Dollar denominated losses need to be paid in dollars. For this you need, obvioulsy, dollars. The usual method is to go to US banks and borrow dollars. But at the moment US banks don’t want to lend to European banks. This is why the FED has had to open Dollar swap lines with European central banks much to the ire and anger of Americans who suspect the FED is accepting any old Euro trash paper as collateral. Could be. I’d be put out too.
But the Fed feels it has no choice. US banks and Money market funds are pulling away from Europe. In fact cash is pulling out of Money Market funds in the US just to be on the safe side. Funds are bleeding cash. Citi got so worried that it changed the rules of its funds to not allow withdrawals at short notice. Edging towards a lock in without saying it.
The reason the Fed might feel it has to lend dollars is it does not want a large European bank to default on a dollar loan simply because it cannot get its hands on dollars. And European banks have LOTS of dollar debts and have been rolling short term dollar loans over and over. If it were to stop! Then Lehman’s happens again. Swap lines to euro central banks allow European central banks to try to stand in the way of this eventuality. They buy dollars/dollar debt and have it on hand to lend to european banks. This I think helps to answer my long standing question about the BoE’s insane level of dollar debt purchses.
I have long suspected they were playing a dishonest game with the Fed of you buy mine and I’ll buy yours to prop up each other’s debt sales. I think this is still true. But right now the Fed doesn’t need help selling its debts. BUT I also now think the BoE, that sly old dame, has been laying in a stock of dollar denominated debt against the day when UK banks might no longer be able to borrow dollars at an affordable rate. And this same stash of $220 billion odd dollars would also be a safetly measure against the several hundred billion in bad loans and toxic assets in the Asset Protection Scheme. I have long suspected many of those loans and assets were dollar denominated Commercial Real Estate Loans.
These are among the next wave of debts to default. Thus the BoE might need to be able to pay out in dollars.
Speaking of which there is a large collection of about $1 Billion worth of Commercial Real Esate loans (CRE) that are on the market and some big players are rumoured to be looking to buy them. This sounds fine but has sent shivers through parts of the CRE market because when they are bought they will be priced. An extablished price will crush those who are holding similar ‘assets’ at mark to model values. They would suddenly be a whole lot poorer. Some of those about-to-be-poorer people might well be in Europe, the UK and in the Asset Portection Scheme. They are all going to start feeling the effects of CRE mortgages defaulting soon enough. But this is sooner still.
When this happens banks in Europe will need dollars. If they can’t get them for a price they can afford it could well be the spark that sets things alight one more time.
Just a thought for you to consider.