Tuesday, 13 March 2012

Europe engineers another massive bank bailout, did anyone notice?

Since late December, the ECB have offered cheap loans to European Banks. The facility, called the long term refinancing operation(LTRO), offers 3 year loans at a one percent interest rate. The banks can then buy government bonds offering anything from 3 percent upwards.

It is a scheme, or should I say scam, where banks simply can not lose money, so long as governments don't default on their bonds. But that is to put the horse before the cart. The LTRO was introduced specifically to prevent governments like Italy and Spain from defaulting. So, any bank participating in the scheme has a rock solid guarantee that the ECB will step in and print cash to prevent a sovereign default. So the LTRO is risk free.

In order to receive the cheap money, Banks need to stump up some collateral. Naturally, European banks have handed over every crappy loan and bond they have hiding on their rotten balance sheets. This neatly makes European banks look healthier than they really are. All the rubbish is now on the ECB balance sheet.

How have the banks responded to the LTRO? They LOVE it. During the first round of LTRO, the ECB issued loans totaling €489.2 billion In late February, the ECB introduced LTRO2. They pumped out a further €529.5 billion in low-interest loans, with an astounding 800 banks wanting a piece of the action. Yes, that is over a trillion euros worth of loans.

FT Alphaville printed two charts (see below), which they pinched from UBS, that illustrated the the extent of support offered to banks by the ECB. There are some banks that now ECB loans equal to over 10 percent of their funded assets.

As bailouts go, this one is one of the biggest in human history. Yet, how many Europeans actually understand what has happened? Not many, I fear.


Ralph Musgrave said...

This European “understands what has happened”.

Members of the Euro elite who control the printing press move in the same social circles as the main commercial bank shareholders. Now if you control the printing press, you donate bags full of Euro notes to your mates, don’t you?

Revolving doors have connected the political elite to the banking elite since the world began. For a description of revolving doors in Britain in the 1920s and 30s, see p.79 here:


Captain Ranty said...

The only thing they will notice is force.

Freemen free the UK

firefight coming soon

Anonymous said...

That comment is not Captain Ranty - it's a troll. Please ignore it or delete it.


Anonymous said...

Your observation that the European banks' poorer quality assets are now sitting on the ECB balance sheet is not quite right - using these assets as collateral does not shift them from the borrower's balance sheet, unless the borrower defaults on the loan - which, of course, it won't if the ECB keeps on stumping up free money.

miken said...

It's an unhealthy situation to say the least when a bank can not lose money. It's almost as if anyone who is not working for a bank is effectively a slave to the banks.

jaffa said...

We have all been slave to the banks for the last 20 years at least and probably much longer, just better hidden

Anonymous said...

I agree with Trader Dan:
"And what pray tell have we witnessed our monetary lords and barons doing for the last ten years as far as policy? - why nothing else but managing the fallout from the popping of each successive bubble. Bubbles, which I might add, they themselves have created by employing the same prescriptive medicine, ad infinitum, stupidly looking for a different result each time they experiment upon us. One gets the distinct impression that our financial system is becoming a FRANKENSTEIN ECONOMY - the creation of madmen who cannot see what they have loosed upon the world."

Electro-Kevin said...

Off topic:

Put our house on the market. Within two days we have been advised to drop by 5% on the agent's first valuation. It hasn't been advertised yet. That's 1k below what we bought it at despite
8k of saleable improvements.

The first house we viewed. Already dropped by 40k - pulled off the market for rental having had no offers.

Second house we viewed; we have put an offer in at 30k below asking price. It's being given serious consideration.

Is this a serious market correction going on ?

As far as I'm concerned the valuation we started off with was under agent's advice so I'm inclined to believe that the others were too.

South West btw.