Skip to main content

Yes a solvency crisis for the sovereign but also a liquidity crisis for the banks

Euro 30,000 billion (Americans would say 30 trillion) that's the amount of wholesale financing currently on Europe's bank balance sheet.  European banks rely far more on wholesale market for their funding -- a consequence of their very high leverage.  The problem is that for the past 5 months the wholesale funding market is essentially closed.  

Some will have heard of the LIBOR rate that has exploded, and that the Federal Reserve has expanded the dollar lending operations for European banks.  The problem is far more severe, because the closure of the wholesale market means that banks have to refinance Euro 800 billion in maturing obligation every single month.  Obviously, this is impossible, so European banks are cutting lending (with the obvious economic consequences), they have also been losing deposits to European sovereign institutions -- Siemens transferred several billions to the ECB.

The implications is this liquidity crunch very serious:  Businesses will be refused expansion loans, or see lines of credit cancelled outright (the banks need to reduce their borrowings).  Obviously, the crisis in confidence started with the "fake" stress test of last summer (Dexia the now bankrupt bank came on top as the best capitalized).  The solution is for Europe to follow the American example of 2008 -- for European sovereign institutions to buy new issued Preferred Securities (expensive).  The problem of course is that it will reduce bank profitability (a given with lower leverage -- watch out stock prices) but will allow the banks to operate and not face a liquidity crisis (this is a flow as opposed to a stock issue).  The problem is the size of the necessary exercise:  Euro 2,0000 billion, or 5x what Europe is trying to agree too on the EFSF program.  What are the odds that this will have a happy ending?




Comments

Post a Comment

Popular posts from this blog

Ok so I lied...a little (revised)

When we began looking at farming in 2013/14 as something we both wanted to do as a "second career" we invested time and money to understand what sector of farming was profitable.  A few things emerged, First, high-quality, source-proven, organic farm products consistently have much higher profit margins.  Secondly, transformation accounted for nearly 80% of total profits, and production and distribution accounted for 20% of profits: Farmers and retailers have low profit margins and the middle bits make all the money. A profitable farm operation needs to be involved in the transformation of its produce.  The low-hanging fruits: cheese and butter.  Milk, generates a profit margin of 5% to 8%, depending on milk quality.  Transformed into cheese and butter, and the profit margin rises to 40% (Taking into account all costs).  Second:  20% of a steer carcass is ground beef quality.  The price is low, because (a) a high percentage of the carcass, and (b) ground beef requires process
Post a Comment
Read more

Spray painting Taylor Swift G650 aircraft (updated)

 First, a bit of paint will not harm anyone.  These climate activities are going to learn two things in the next few days:  (1) Trespassing at an airport is a felony almost anywhere in the world.  That means criminal prosecution.   (2) removing paint from an aircraft is expensive.   So these climate activists are about to find out the reach of the British criminal system and it will not be pleasant, the UK has very strict laws about that, I would be surprised if cleaning the aircraft of all the paint will cost less than $100,000.     I am sure that when they planned (premeditation) this little show they had a very valid logic to doing this.  Tonight, they are probably realizing the depth of their troubles.   I understand that in the UK it's a minimum one-year jail sentence.    Also, good luck travelling with a criminal trespass charge against you.  I am relatively certain that the airline industry will slap them with no-fly status. Update;  It seems that what they threw on the airc
Post a Comment
Read more

21st century milk parlour

When we first looked at building our farm in 2018, we made a few money-saving decisions, the most important is that we purchased our milk herd from a retiring farmer and we also purchased his milking parlour equipment.  It was the right decision at the time.  The equipment dates from around 2004/05 and was perfectly serviceable, our installers replaced some tubing but otherwise, the milking parlour was in good shape.  It is a mature technology. Now, we are building a brand new milk parlour because our milking cows are moving from the old farm to the new farm.  So we are looking at brand new equipment this time because, after 20 years of daily service, the old cattle parlour's systems need to be replaced.  Fear not it will not be destroyed instead good chunks will end up on Facebook's marketplace and be sold to other farmers for spare parts or expansion of their current systems. All our cattle are chipped, nothing unusual there, we have sensors throughout the farm, and our milki
Post a Comment
Read more