Creators and casualties of complexity: why banks are eurozone’s fault line [BBC]


The familiar expression that springs to mind is “what goes around comes around” or, in Biblical terms, perhaps befitting the scale of the problem…

“as you sow so shall ye reap”

However, please note the deliberate use of the term “casualties” rather than victims. Because, the ability to socialise the losses renders citizens as the VICTIMS!

Here’s the lethal chain of causality: banks have found it harder to borrow because of their big loans to the likes of the Italian, Spanish and Portuguese governments, and because of fears these governments will struggle to repay their debts; but if one or more of the banks were nationalised, the perceived liabilities of these governments would increase; and that in turn would erode confidence in the ability of other banks to repay what they owe; and so on, till no institution in the eurozone is seen to be sound.

Or to put it another way, we have a sovereign debt crisis, which caused a banking crisis, which is in turn leading to a worsening of the sovereign debt crisis, in a vicious cycle that threatens to destroy the currency union.

via BBC News – Why banks are eurozone’s fault line.

Euro denominated liquidity provision has more than doubled since the summer, and in late November was being used throughout the sector (e.g. 178 banks sought liquidity in the weekly tender of 22 November). In addition to its euro intervention, coordinated Central Bank intervention has been provided to add emergency US dollar denominated liquidity to European banks, with $50.7bn of 84 day financing provided on 8 December.

  • The Eurozone crisis is no longer simply a sovereign debt problem, but also a major systemic threat to the global banking system. This explains why several central banks intervened in December to provide dollar liquidity to the financial system. Further measures will be needed to secure banking stability.
  • Major European banks such as Commerzbank and Société Générale face serious market pressure, catalysed by their write-downs of exposures to Greek debt. The European banking sector as a whole is in a highly precarious position given limited appetite for bank debt, the need to increase capital, and a fundamental mistrust of banks.
  • Likely haircuts on the sovereign debt of Italy and Spain would probably require government rescue of French and German banks; their exposures to Italy and Spain are 13 times larger than their exposures to Greece.
  • Bank deposits are falling rapidly in Greece and more slowly in Ireland and Portugal. As more investors fear their euro accounts could be frozen and redenominated into new national currencies, bank runs are becoming a real risk.

For me, this final point gets closer to causality than much of the other discussion and debate. Why would ANYONE put their trust in financial and political institutions for whom TRANSPARENCY is in even shorter supply than liquidity???   

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