The Corner

Welcome to the Machine

Via EUObserver

Banks put €820.8bn on deposit at the ECB overnight Friday, beating the previous record set the day before of €776.9bn, AFP reports. This suggests that banks rather park the money than lend to each other, despite the fact that the ECB has pumped over half a trillion euros [that must be a net figure] into banks.

That doesn’t say much for the confidence that Europe’s banks have in each other. Banks that have borrowed the ECB’s money under the recent refinancing operations will actually lose money if they re-deposit funds with the ECB, but that’s what they are doing. There’s a price to be paid for safety, I suppose.

But then there’s this from the Economist:

WHEN it comes to central bank (and indeed, government) intervention, it is easier to provide support than to withdraw it. Take the ECB’s trillion euros worth of three-year lending to the European banking sector. It has generally been welcomed by commentators (including this newspaper) and by the market.

But one senior financier today pointed out a side-effect. He said that his bank no longer lent money in the interbank market. The reason? When banks borrow money from the ECB they (quite rightly) have to pledge collateral. The result is that any spare bank assets that aren’t nailed down are pledged to the central bank. Any interbank lender would be behind the ECB in the queue should the worst happen. That’s why a lot of money is placed back at the ECB; it may not pay much interest but it’s safe.

So instead of a once-thriving interbank market, we now have a lot of commercial banks that are “wards” of the ECB. Perhaps they can be weaned off the support if they make profits and build up their capital that way but it will be a slow process.

That may be somewhat (perhaps) exaggerated, but the underlying problem is not (and that’s why the ECB’s refinancing operations were necessary in the first place): Europe has too many fragile banks, over-exposed to too many over-indebted countries  trapped within a currency that is choking off their chances of recovery.

Perhaps it’s worth remembering these sentences from an article by the FT’s Gideon Rachman that I posted the other day:

Behind the scenes, however, some of the brightest minds in the German government have a sense of deep foreboding. Twice in the past year I have found myself sitting next to different senior German officials at a dinner who have proceeded to tell me that the whole single currency was a terrible mistake. Speaking of the euro, one of my companions said: “It seems to me that we have invented a machine from hell that we cannot turn off.”



The Latest