Thursday, 1 December 2011

So what did the Yanks do to help out the Eurozone and why?

Formally a consortium of central banks led and organised by the US Fed agreed to lower the cost of existing dollar swap lines by 0.5% from 5th Dec. These central banks were all obviously singing from the same hymn sheet. It looks like a pre-arranged contingency plan agreed by the central bankers club but what was the contingency that triggered their plan? Clearly it was one or more major Eurozone banks could not access dollar liquidity at any price to roll over their dollar positions. Other banks simply did not want to lend to them. This was exactly the scenario that brought down Northern Rock, however as it was a comparatively small bank it posed no major systemic threats to the banking system.

This time it must have been one or more big Eurozone banks most likely French but possibly German that were in real trouble. The Yanks stepped in and not for the first time pulled the Europeans chestnuts out of the fire. They won't get any thanks for this from the EU elite who will continue to blame the failure of their great project not on its flawed design but on the perfidious Anglo Saxons.

This has  been building up for some time. John Redwood points out, " More and more of the business that used to go through the inter-bank market now goes through the Central bank of the system. Commercial banks do not trust each other enough to lend and borrow between themselves on a big enough scale for their needs. The weekly liquidity supplied by the ECB to banks rose to Euro 265 billion." They of course get less interest on their money than they would get on the inter bank market but they are sure they will be repaid in full. They are scared to lend in size to each other so for sure they won't be lending to business either. Bad news for the Eurozone economy.

What the Yanks did has worked at least in the short term.Italian 10 years dropped below 7% to 6.7% with Spanish bonds dropping to 5.8%. Less obvious but I think more significant was the drop in French 10 year rates to 3.1% a spread to gilts of 80 basis points. This spread has been well over 100 basis points for the last month.  It looks like it may have been a French bank that was in difficulties. The French had a relatively successful bond auction today which I suspect was largely French bank activity.

But its only a short term liquidity fix and does nothing to address the underlying insolvency of many Eurozone countries. Tonight Sky reported that the Spanish central bank  expected the crisis to worsen.  A strange statement given Spain had a relatively successful bond auction today. Sure they paid a lot more than last time but they sold €3.5 bn bonds. I suspect banks were coerced into making it a success.

On the home front MAK was putting on his hair shirt and urging banks to conserve capital and cut bonuses. Ask not why MAK is not popular. I wish GB had appointed Andrew Crockett or Howard Davies 8 years ago.

On the UKIP front its good to see John Petley back writing on the EU. He is an able and talented man and like many of that ilk kicked out by the talentless Farage  Cabal.

No comments: