ECB Shells Out €1,437 Per Eurozone Citizen to Banks

Wednesday, June 24, 2009

If your small-time loan you need for your kid's bracelets is denied by your bank's customer representative, you have every right to go berserk.
The European Central Bank (ECB) came up with one of their ominous "innovations" on Wednesday that essentially is nothing else than a new form to print still more money. With a record tender of €442,000,000,000 (that is €442 billion) the ECB has showered Eurozone banks with €1,437 for every Eurozone citizen in its first tender with a 371 day maturity, accepting all bids at the fixed official rate of 1%.
BTW how much does your bank charge you for an overdraft? I presume it is closer to 10%, leaving the banks with a hefty profit that makes me understand why even the bible discusses usury.
These figures show that ECB president Jean-Claude Trichet and all the governors on the ECB's council have been publicly denying what cannot be overseen anymore: The Eurozone system is broken beyond repair. Check these posts where the (expletive) central bank(rupt)ers have told us since the onset of the crisis in August 2007 that all is well and contained. My god, I yearn for the good old times of the subprime crisis when I could enrage myself about lousy €50 billion quick tenders. Check my archives since August 2007 for more chronology of the subprime crisis mutating into a full blown global banking crisis.
These Numbers Promise More Hyperinflation
With the latest "innovations" in the process of digitizing new fiat money the ECB basically does the same what it has done since the onset of the crisis: Creating more new money, only with longer maturities and less regard for the quality of collateral, whose rules it softened last year.
Only yesterday Austria's central bank governor Ewald Nowotny had told a champagne drinking crowd at the annual self-celebration of Austrian bankers that the worst is yet to come; an abrupt U-turn after he developed a 100% wrong track record since he took office last year.
The inofficial sounds that reach my ears fully agree with this bleak outlook. The Eurozone's cross border banks had gone completely mad in Eastern Europe. Or what would you call €800,000 condos in Sofia/Bulgaria where the average net monthly income is €300?
Bulgarian tax authorities are now checking all Bentley owners - and there are lots of them - from where their cash stems. Small hint: from foreign banks hallucinating when they pushed loans onto people, charging them 16% interest and more.
Lets not forget that this will blow up the ECB's balance sheet next week, propelling it again over the €2 TRILLION mark.
All this happens at a time when all consumers in the old world have gone into standby mode, deferring everything but the most important items like food when they go out shopping.
I notice more and more shops selling luxury items (like balsamico vinegar and Dijon mustard ((the original producer company went bankrupt last year)) that now glue ads into their windows, offering discounts between 10% and 50%.
Being used to bazar methods from my many years in Asia I can now immediately claim the status of a "regular" customer, getting huge discounts the first time I frequent a store.
A story in the Bubble Street Journal (WSJ) has more details on Europe's way into hyperinflation. From the WSJ:
Euro-zone banks borrowed the one-year funds, the largest amount the central bank has ever dispersed at a single shot, at the ECB's current key rate of 1%. Much of the total likely substituted for amounts banks had been borrowing from the ECB for shorter time periods, so the net stimulus to the economy is less than it appears at first sight.
The novelty lies more in the length of time over which the ECB is prepared to offer unlimited funding, reflecting a desire to bring longer-term money-market interest rates down to where it thinks they should be...
Analysts said the high demand for the funds reflected the problems some banks are still having in funding their businesses.
At the same time, it also reflected expectations that the euro zone's economy will start to recover later in the year and that ECB interest rates are unlikely to fall further. ECB policy makers have signaled they are not inclined to cut their key rate -- now at the lowest level in the central bank's 11-year history -- again unless the euro-zone economic outlook darkens substantially. Analysts expect the key rate to hold steady at 1% through year end.
"We are nowhere near the beginning of a tightening cycle, but we are getting closer to the end of the easing one," said Lauren Mutton, a strategist with Margin Stanley in London....
The Paris-based Organization for Economic Cooperation and Development said Wednesday in its latest forecasts that the ECB still had scope to cut its key rate further.
At the peak of the crisis, banks were using over €1 trillion in short-term funding from the ECB. As fears of a complete meltdown of the financial system have eased, that has fallen to around €618 billion.
During the worst of the crisis, banks were forced to live from week to week, always anxious about access to liquidity. In response, the ECB offered money first for three, then six and now 12 months to give banks greater clarity in their operations, hoping the certainty of longer-term funding from the ECB would encourage them to lend again to the real economy.
"This should reassure the banks that they have adequate liquidity for the next 12 months," ECB governing council member Lorenzo Bini Smaghi said in a speech to a university in Rome Wednesday.
By promising a full allocation of all bids on Wednesday, the ECB has effectively passed responsibility for any easing of policy to the banks themselves, giving complete license to any institution that thinks it can lend the money out profitably into the real economy.
"They must pass it along," Mr. Bini Smaghi said.

This is exactly the problem that has not been solved in the last 22 months and will also not be solved by creating pan-European watchdogs for the financial industry: Banks are not willing to lend unless you present them with 200% collateral. As always, credit is only around for those who don't really need it. Anybody wagering a bet that Europe will recover within the next 12 months. I'd love to take the other side.


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