Another week, and another ’500 billion of QE from the ECB, eagerly gobbled up by the more busted banks of the EU
Another week, and another €500 billion of QE from the ECB, eagerly gobbled up by the more busted banks of the EU, especially Italian and Spanish banks. Wasn’t this where this crisis started back in 2008, with too much money chasing questionable assets, with lax central bank controls and low interest rates that proved to be far too low for far too long?
Remember all that dicing and slicing of subprime debt on Wall Street to produce shiny new CDOs all wrapped up in CDSs? For those who have forgotten or didn’t know, it’s like slicing and dicing different grades of dogshit and packaging it up in shiny new tins marked ‘The 58th Variety’, but when you open the tin to reveal what you thought was your security…
This, or something just as messy, is what the ECB is engaged in with its so-called LTRO (anything other than QE) programme. It is obvious that this programme open to all-comers will appeal to the weakest banks, the ones who should be allowed to go bust, as they struggle for life-prolonging liquidity. These banks use this cash to make a guaranteed 2%+ for three years by buying their country’s sovereign bonds and refinancing their existing busted assets.
The ECB sits smugly secured, not on the duff collateral they agree to take from the borrowing banks as security, but on the fact that its money is secured ahead of other banks and creditors, who, as a result of a transaction they were not a party to, are now in a worse position as regards their own supposed security. It’s ‘Pray and delay’ for the recipients, without hopefully turning into ‘Delay and dismay’ for their existing lenders. Keeping weak banks going, as you see, weakens the whole system, and the currency.
Captain Mario Draghi of the ECB is taking a big gamble, which looks good to begin with: with that other Italian-skippered Costa Allegra out of electricity, food and forward momentum, just like the eurozone economy, a dose of liquidity into the banking system was necessary to stave off a nasty, unquantifiable and imminent capsize at a time when Greece could have gone belly-up and defaulted.
But Greece has been “saved” by an equally dangerous gamble, and may still default, and possibly in the near future too, with untold losses and consequences for the banking system, now further indebted to the ECB’s QE of a cool €1 trillion. Just pouring more debt onto already over-indebted entities to stave off the evil day has been the hallmark of this crisis throughout, but if the evil day cometh, the losses and consequences could be exponentially worse with every failed throw of the well-intentioned dice.
It’s this kind of thinking which has got the Bundesbank questioning this whole LTRO programme in the past week: they can see it all rebounding like a boomerang back to the ECB, which means all the members’ central banks the ECB is meant to support may have to end up supporting it instead, so that it can support all the busted EU’s lending banks further.
QE in the eurozone, you see, is not the same as in the US and UK, which have just one central bank and one national debt. As I said, lending money to busted banks and over-indebted entities is not necessarily a smart thing to do in any economy, as you still don’t know where the losses really are or where they will eventually end up in a crisis.
In the meantime, with no one in authority in the EU even considering the real issue of growth, every two-bit bank manager of every busted EU bank is happy to take the cheap ECB’s largesse and bury their problems, like cats burying their crap. Well, that’s one better than dogshit, provided it stays buried and doesn’t resurface unexpectedly, like outside the front door of the Bundesbank.