It wasn’t a bazooka, it was a stampede, a lemming-like rush not towards a cliff but a wild charge towards an oasis of comfort: 489 billion euros of solace, or in Australian dollars, around $630 billion of three year loans from the European Central Banks, with another three year auction coming up next February.
A total of 523 banks across the 17 countries of the eurozone borrowed money for the next three years from the ECB, a move which has expanded the central bank’s balance sheet by 20%, which rivals some of the quantitative easings seen from the US Fed, the Bank of England and the Bank of Japan. The Europeans, especially the German Bundesbank, would never describe this as being on a par with what the other central banks have been doing, but the impact is the same and perhaps more vital (as is the objective); to bailout the region’s broken banking system and prevent it from imploding and destroying the euro and the zone.
The total amount borrowed stunned markets, with forecasts the loans would total around 290 billion euros. It shows the extent of the credit freeze across Europe, including the full EU (which covers Britain and others). It is quite clear that all European financial markets are essentially frozen, a situation that placed in jeopardy the health of the entire global financial system, as it did back in August 2007 when the crunch first struck in Europe on August 8 and 9 when some French banks couldn’t refinance some of their loan books.
To put it in an Australian context, it is just under half the size of the Australian economy, but to give it its proper weighting, the amount is also more than eurozone banks borrowed back in 2009 in a similar facility at the height of the GFC (Mark 1), a sign of how the crisis has never gone away, despite all the airy fairy talk of summits, solutions and bailout funds.
Now, like banks in Japan in the 1990s and some of the world’s biggest name in banking, especially those in France, are on the public teat, sucking up billions of euros of newly created money from the European Central Bank in a slight of hand Mandrake the Magician would have been proud to call his own. The ECB’s money keeping them, their national economies, Europe and the rest of the world from another, painful slump. All at a cost of 1%. The banks can use that to repay debt, lend, hoard or invest in their sovereign’s debt.
This new funding is on top of the 200 billion or more euros spent (around $A330 billion) supporting the sovereign debt of Italy, Spain, Greece, Portugal, Ireland and Greece by buying it in the secondary market. As well the ECB has lent around 60 billion of US dollars via a swap with the Fed, but eurozone banks have hundreds of billions of euros on deposit at the ECB and this is where the money will end up for a while.
According to the recent stability report from the Bank of England, eurozone banks need to refinance more than 600 billion euros of debt maturing next year, about three-quarters of which is unsecured. That’s 35% more than this year’s refunding, which has now been finished off by the ECB. Next February’s second auction should cover loans maturing out into 2013 and perhaps into early 2014.
ECB President Mario Draghi told the European Parliament this week: “Banks represent about 80% of lending to the euro area. The banking channel is crucial to the supply of credit.”” He predicted banks will experience “very significant funding constraints” for all of 2012. The loans overnight won’t change that outlook for next year, but they will prevent banks from collapsing or seeking state aid because they can’t fund maturing loans, a situation which would have triggered a downward spiral and taken the rest of the global financial system with it.
In that respect, the dangers to Australia, China, Japan and other major economies and financial systems has retreated: we are still exposed to the damage to come from the European recession (Italy’s economy contracted 0.2% in the September quarter instead of growing by the same amount, according to market forecasts. The EU grew 0.2% in the quarter) in 2012. But that is a much more easily handled situation for authorities than a desperate flight of capital and implosion in the eurozone.
So the fears about the spillover from Europe held by the Reserve Bank (as we saw in the minutes of the December board meeting, a speech last week by Deputy Governor, Ric Battellino and the post board meeting comments from Governor, Glenn Stevens), have eased because of the huge take up of loans by the more than 500 banks. Those worries haven’t gone away completely, but it is clear the ECB has stepped in and supported the most vulnerable part of Europe, not Italy or Spain, but the entire banking system.
Some of those banks have to find $114 billion of new capital by next June, and state aid will be the only source (especially in Germany with Commerzbank). But this is a situation more easily handled, as will be finding a solution to the funding crisis for Italy and Spain.The French government, led by the artful dodger Nicholas Sarkozy, reckons the ECB money can be used to support the sovereign debt of zone countries under pressure, such as France (Italy and Spain are more pressing cases, but you know the French, its all “us, us, us”).
But will it? According to Bloomberg, Barclays bank reckons around 193 billion euros of new money will become available from the 489 billion — the rest will be used to pay off maturing loans. Italy and Spain have more than 200 billion euros of debt falling due next year, France and other troubled countries have hundreds of billions more. One important outcome of the loans is that they will now encourage banks not to sell EU sovereign debt, as they have been doing for the last six months.
Funding the banks by using its balance sheet should end the talk about the need for a bigger stabilisation fund … the ECB has stepped in and by funding the banks, it is funding the sovereigns who would have had to sump up fresh capital to expand those funds (Italy paying to save Italy is a dopy idea) to keep them credible in the eyes of financial markets. That would have seen the likes of France, Austria and other AAA countries downgraded (even Germany?). On top of that, the ECB is also keeping alive banks which may have failed, and needed new capital from sovereign governments.
By funding the banks, the ECB has appeared on the scene in the second to last scene of this bad movie, with a white hat on, saving everyone; the bankers, governments and their sovereign ratings from downgrade and worse.
So what now? Well, the extent of the damage to the rest of the world will be seen in updated forecasts from the IMF late next month. Fund chair, Christine Lagarde said overnight: “I am almost certain … that the forecasts will be revised down” in January, Lagarde said in a speech made in the African country of Niger. She said that “clouds building up, especially over Europe, mean we have to lower our outlook”. At present the IMF sees the global economy growing at 4% in 2012, 3% or less looks a better guesstimate.
There are the inevitable credit rating downgrades to come in Europe and elsewhere. The UK was warned this week by Moody’s that its prized AAA rating is in jeopardy. And don’t forget the US. Yes, the economy has moved from moribund to active sluggish. But its credit rating is in danger because Fitch is threatening to join Standard & Poor’s (which cut the AAA rating in August). Fitch says the high and rising US federal and general government debt burden is not consistent with keeping the AAA rating. It also says that it won’t happen before 2013 — post the November elections.
The sense of panic hasn’t gone away, but the ECB has stopped the rot now. It cannot depend governments and politicians to help because they have a long list of failures in 2010 and 2011. The eurozone leaders have called another summit for late January (one was planned for March). This will be the sixth since Greece hit the fan in late 2009. What they don’t seem to understand that there’s no time for political solutions, it’s all about money.
But having created 489 billion euros, and more to come in February for the needy, the ECB through an accepted central banking operation, has provided the money and given the eurozone three years (until late 2014) to make the necessary tough decisions to change the EU and the eurozone into viable entities, capable of standing alone.
The question for 2012 is the pace of that panic: a slow panic still grabs you in the end. Knowing Europe and the various governments there’s something out there with the capacity to bring on that feeling, once again, of an inevitable slide towards a gaping black hole that many have felt for the last three months.