ECB lends almost a half a trillion Euros to ease EU bank lending

December 21, 2011 by · Leave a Comment
Filed under: Credit News 

First off, Happy Holidays.  It has been quite busy for me this time of year.   I heard about this story in the morning and thought it was a bridge to no-where because these “loans” are repurchase agreements or REPOs.  Again they are trying to solve a debt crisis by issuing more debt.  On top of that, they are basically giving away free money to creditors that made bad decisions in the hope they will be able to ride the “float” (interest) all the way to a solid balance-sheet.

Its the worst form of social welfare you can have.  When sophisticated people invest capital, there has to be real risk of loss or they will not be prudent with their money.  Now this is not just a rant against another bad program.

I was watching Bloomberg TV on the Pimm Fox show today and maybe it was my more conspiratorial side but they had an expert on the show, explaining this deal and talking about its merits.    Near the end of the segment, they were talking about senior creditors and the guest mentioned the fact that they had to pledge assets to secure these loans and how these loans were structured, the ECB was now in fact the most senior creditor and this was a little talked about fact.  At that time, the sound cut out while he was finishing his point.  Maybe it was just a technical glitch but it was very timely and I really wanted to hear what he finished with.   Maybe it is just me, but I wonder if the other creditors to these 500+ banks understand that has just happened if this is the fact in the matter?

New York Times – After more than a year of frustrating and mostly fruitless summit meetings of European political leaders, the European Central Bank appears to have found a more promising way to ease the euro zone crisis: give money to banks at bargain-basement rates.

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ECB must buy ‘hundred of billions’ of bonds to tame Europe’s debt crisis

June 21, 2010 by · Leave a Comment
Filed under: Global News 

This situation in the EU is starting to get pretty dire with interest rates on more Euro Zone country bonds rising much higher than the flagship German economy.  In the article the European Central Bank said that this purchase operations would be a sterilized program.  This means that these operations should not impact the money supply by increasing it.

If you look at how they are going to implement the program, this is flat out not true.  They plan on purchasing the bonds outright from investors and governments alike.  When you purchase these bonds, they are giving cash or equivalent  in exchange.  This money can be spent at that point on any number of endeavors.  That does not meet the criteria of sterilized.  Even if they just create the credits now to purchase those bonds, in the future you are creating inflation when those bonds come due and you either need to pay them off or create even more bonds (debt obligations) and roll over the debt.  There is only 3 options with any debt, pay off, default or refinance.  All these programs created always fall under one of three of these.

I am very eager to see the EU’s plan to prevent a double-dip recession in July.

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Banking crash hits Europe as ECB loses traction in money markets

September 30, 2008 by · Leave a Comment
Filed under: Economic News 

This is getting more serious by the day.  Looks the like European Central Bank or ECB is really seeing their banking freeze up as well.  In the article they mention the five failed banks that have been rescued because of the massive strain in the system.  Europe will need to de-leverage as well.   UK especially, had a very over heated real estate market that was fueled by securitization of mortgages and hedging strategies against different bonds for default with insurance products such as credit default swaps or CDS.  They mention the inter-bank lending market has collapsed and “The ECB is no longer able to inject liquidity because the money is just coming back to them again. This is extremely serious. If monetary policy is no longer working, there is a risk that the whole system will blow up in days.”  At this moment is when people need to not panic and let these bad institutions fail so we can clean the system of all this excess and set the right precedent so future banks will understand what happens when you conduct such reckless lending operations.  I have read basic banking and lending theory and everything that has been pasted down in that area was ignored in all cases in this industry from making subprime loans to not carrying adequate reserves against losses on debt insurance contracts.  We should never forget the basics and fundamentals.

News Article:

The Dutch-Belgian bank Fortis, Britain’s Bradford and Bingley, and Iceland’s Glitnir, were all partially or fully nationalized after failing to roll-over debts in the short-term money markets, while the French state pledged support for the Franco-Belgian lender Dexia after the share price collapsed on reports of a capital shortage.

“The European financial sector is on trial: we have to support our banks.” said French President Nicolas Sarkozy. He has reportedly ordered the state investment arm Caisse Des Depots to shore up Dexia, even though the bank is based in Belgium.

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Money Market `Plagued’ by Libor That Fed Can’t Reduce

August 10, 2008 by · Leave a Comment
Filed under: Economic News 

A year after central banks started to pump trillions of dollars into the financial system to end a seizure in credit markets caused by subprime mortgages, cash is about as tight as it’s ever been.

The U.S. market for commercial paper, or short-term IOUs, backed by assets such as mortgages has shrunk 40 percent from its peak in July 2007. The amount borrowed in pounds between banks in the U.K. fell by 70 percent in June from a record in February 2007. The European Central Bank received $100 billion of bids for the $25 billion it offered to financial institutions on July 29, the most since the sales began in December.

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