One of the most worrying articles I’ve read so far on the ongoing European debt crisis. The Economist is seriously discussing the prospect of imminent bank runs in the eurozone. In fact, in one country, Latvia, this has already happened with a mid-sized bank. That’s the first time I read something about this most scary of economic malfunctions (although Paul Krugman was there first, I’m informed).
With the debt crisis spreading and deepening further to the core of the eurozone – France and Austria are defending their triple-A ratings, Belgium, the Netherlands and now Germany are having bonds issues – and politicians unable (and unwilling) to do something about it, banks are more and more exposed to great financial risks. These stem from the drying up of funds to these financial institutions, which could ultimately lead to one or more of them going down. One of the most worrying signs of this is corporate institutions withdrawing their money from banks. And that’s exactly what’s happening now in Italy, Spain, France and Belgium.
I believe articles like these are called “bearish” in the financial world. Still frightening nonetheless.
- Edit: CNBC is on it as well, referring to the same Economist article. Their message: hoping that customers don’t notice that every other source of bank funding is depleting is not a wise strategy.
ONE can almost hear the gates clanging: one after the other the sources of funding for Europe’s banks are being shut. It is a result of the highly visible run on Europe’s government bond markets, which today reached the heart of the euro zone: an auction of new German bonds failed to generate enough demand for the full amount, causing a drop in bond prices (and prompting the Bundesbank to buy 39% of the bonds offered, according to Reuters).
Now another run—more hidden, but potentially more dangerous—is taking place: on the continents’ banks. People are not yet queuing up in front of bank branches (except in Latvia’s capital Riga where savers today were trying to withdraw money from Krajbanka, a mid-sized bank, pictured). But billions of euros are flooding out of Europe’s banking system through bond and money markets.
At best, the result may be a credit crunch that leaves businesses unable to get loans and invest. At worst, some banks may fail—and trigger real bank runs in countries whose shaky public finances have left them ill equipped to prop up their financial institutions.
To make loans, banks need funding. For this, they mainly tap into three sources: long-term bonds, deposits from consumers, and short-term loans from money markets as well as other banks. Bond issues and short-term funding have been seizing up as the panic over government bonds has spread to banks (which themselves are large holders of government bonds). This blockage has been made worse by tighter capital regulations that are encouraging banks to cut lending (instead of raising capital).
Markets for bank bonds were the first to freeze. In the third quarter bonds issues by European banks only reached 15% of the amount they raised over the same period in the past two years, reckon analysts at Citi Group. It is unlikely that European banks have sold many more bonds since.
Short-term funding markets were next to dry up. Hardest hit were European banks that need dollars to finance world trade (more than one third of which is funded by European banks, according to Barclays). American money market funds, in particular, have pulled back from Europe. Loans to French banks have plunged 69% since the end of May and nearly 20% over the past month alone, according to Fitch, a ratings agency. Over the past six months, it reckons, American money market funds have pulled 42% of their money out of European banks. European money market funds, too, continue to reduce their exposure to France, Italy and Spain, according to the latest numbers from Fitch.
Interbank markets, in which banks lend to one another, are now also showing signs of severe strain. Banks based in London are paying the highest rate on three month loans since 2009 (compared with a risk-free rate). Banks are also depositing cash with the ECB for a paltry, but risk-free rate instead of making loans.
That leaves retail and commercial deposits, and even these may have begun to slip away. “We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium,” an anlayst at Citi Group wrote in a recent report. “This is a worrying development.”
With funding ever harder to come by, banks are resorting to the financial industry’s equivalent of a pawn broker: parking assets on repo markets or at the central bank to get cash. “We have no alternative to deposits and the ECB,” says a senior executive at one European bank.
So far the liquidity of the European Central Bank (ECB) has kept the system alive. Only one large European bank, Dexia, has collapsed because of a funding shortage. Yet what happens if banks run out of collateral to borrow against? Some already seem to scrape the barrel. The boss of UniCredit, an Italian bank, has reportedly asked the ECB to accept a broader range of collateral. And an increasing number of banks are said to conduct what is known as “liquidity swaps”: banks borrow an asset that the ECB accepts as collateral from an insurer or a hedge fund in return for an ineligible asset—plus, of course, a hefty fee.
The risk of all this is two-fold. For one, banks could stop supplying credit. To some extent, this is already happening. Earlier this week Austria’s central bank instructed the country’s banks to limit cross-border lending. And some European banks are not just selling foreign assets to meet capital requirements, but have withdrawn entirely from some markets, such as trade finance and aircraft leasing.
Secondly and more dangerously, as banks are pushed ever closer to their funding limits, one or more may fail—sparking a wider panic. Most bankers think that the ECB would not allow a large bank to fail. But the collapse of Dexia in October after it ran out of cash suggests that the ECB may not provide unlimited liquidity. The falling domino could also be a “shadow” bank that cannot borrow from the ECB.
Check out Nobel Prize winner Paul Krugman in the NYT on the response of both Wall Street financiers and Republican politicians to the Occupy Wall Street protests, aptly titled ‘Panic of the Plutocrats’:
It remains to be seen whether the Occupy Wall Street protests will change America’s direction. Yet the protests have already elicited a remarkably hysterical reaction from Wall Street, the super-rich in general, and politicians and pundits who reliably serve the interests of the wealthiest hundredth of a percent.
And this reaction tells you something important — namely, that the extremists threatening American values are what F.D.R. called “economic royalists,” not the people camping in Zuccotti Park.
Consider first how Republican politicians have portrayed the modest-sized if growing demonstrations, which have involved some confrontations with the police — confrontations that seem to have involved a lot of police overreaction — but nothing one could call a riot. And there has in fact been nothing so far to match the behavior of Tea Party crowds in the summer of 2009.
Nonetheless, Eric Cantor, the House majority leader, has denounced “mobs” and “the pitting of Americans against Americans.” The G.O.P. presidential candidates have weighed in, with Mitt Romney accusing the protesters of waging “class warfare,” while Herman Cain calls them “anti-American.” My favorite, however, is Senator Rand Paul, who for some reason worries that the protesters will start seizing iPads, because they believe rich people don’t deserve to have them.
Michael Bloomberg, New York’s mayor and a financial-industry titan in his own right, was a bit more moderate, but still accused the protesters of trying to “take the jobs away from people working in this city,” a statement that bears no resemblance to the movement’s actual goals.
And if you were listening to talking heads on CNBC, you learned that the protesters “let their freak flags fly,” and are “aligned with Lenin.”
The way to understand all of this is to realize that it’s part of a broader syndrome, in which wealthy Americans who benefit hugely from a system rigged in their favor react with hysteria to anyone who points out just how rigged the system is.
Last year, you may recall, a number of financial-industry barons went wild over very mild criticism from President Obama. They denounced Mr. Obama as being almost a socialist for endorsing the so-called Volcker rule, which would simply prohibit banks backed by federal guarantees from engaging in risky speculation. And as for their reaction to proposals to close a loophole that lets some of them pay remarkably low taxes — well, Stephen Schwarzman, chairman of the Blackstone Group, compared it to Hitler’s invasion of Poland.
What’s going on here? The answer, surely, is that Wall Street’s Masters of the Universe realize, deep down, how morally indefensible their position is. They’re not John Galt; they’re not even Steve Jobs. They’re people who got rich by peddling complex financial schemes that, far from delivering clear benefits to the American people, helped push us into a crisis whose aftereffects continue to blight the lives of tens of millions of their fellow citizens.
Yet they have paid no price. Their institutions were bailed out by taxpayers, with few strings attached. They continue to benefit from explicit and implicit federal guarantees — basically, they’re still in a game of heads they win, tails taxpayers lose. And they benefit from tax loopholes that in many cases have people with multimillion-dollar incomes paying lower rates than middle-class families.
This special treatment can’t bear close scrutiny — and therefore, as they see it, there must be no close scrutiny. Anyone who points out the obvious, no matter how calmly and moderately, must be demonized and driven from the stage. In fact, the more reasonable and moderate a critic sounds, the more urgently he or she must be demonized, hence the frantic sliming of Elizabeth Warren.
So who’s really being un-American here? Not the protesters, who are simply trying to get their voices heard. No, the real extremists here are America’s oligarchs, who want to suppress any criticism of the sources of their wealth.
What I think the best thing of Occupy Wall Street is is that it finally puts the financial malpractices of an industry very much related to the actual top 1 percent of super-rich people in the US, in combination with their rescue by 99 percent of tax payers (i.e., the public), on the democratic agenda.
But the fundamental injustice in pretty much the entire Western world nowadays is the fact that the welfare state, a scheme for the public good, is being dismantled as a result of costs made to save the financial industry. An industry that through its own corrupt schemes, not beneficial to anyone but themselves, has itself created the greatest economic recession since the nineteen-thirties. They should not be awarded bonuses. And poor, sick and unemployed people should not have to suffer for them. There is nothing ‘left-wing’ about that. It’s common sense. That’s why I would love to see these protests spread to Europe, even though I myself am in favour of a regulated form of capitalism.
Finally – not from Paul Krugman – to point out empirically how disparagingly vast the gap between the top 1 percent and the lower 90 percent in the US is, check out these stats from Mother Jones. The first shows the composition of the top 1 percent; the second shows their wealth.
I mean, seriously. There’s nothing wrong with a bit of wealth inequality. But you don’t need to be a socialist to understand that such a huge gap between rich, middle class (if not already vaporized) and poor is not beneficial to any society, let alone a democratic one. And this gap has widened exponentially in the last thirty years, it wasn’t there before. The most fucked up societies are the ones with sudden, huge material inequalities. With the exception of the UK, Europe’s not as bad as the US in this respect – but getting close.
After a financial crisis in which the state had to use public money to rescue banks who through their own exploitative neoliberal behaviour had come into trouble, and an economic recession as a result of that, now the people pay the price through the rightwing turn to huge budget cuts and “austerity” that is suddenly all the vogue – at least in Europe. This of course primarily affects already stripped-down welfare arrangements. While of course in formerly spendthrift countries like Greece and Great Britain huge cuts have to made, in a country like the Netherlands, which is basically doing fine economically and isn’t running a huge deficit at all, one can question the need for the biggest budget cuts in history, now planned by the threesome of rightwing parties that will likely form the next government. Apart from doing grave damage to the entirety of the public sector, it might stifle an economy that is just getting back on its feet.
But yeah, we have to make budget cuts of 18 billion euros in the next four years, because that’s what a healthy, sane, wise economic policy looks like.
Although you don’t hear it in the Netherlands, a lot of people think otherwise. Like President Obama, who has repeatedly warned European states that budget-slashing could threaten global economic recovery, and Nobel Prize winning economist Paul Krugman, who in this NYT piece challenges the received wisdom on the European Right that enormous budget cuts are the only remedy to help get the economy back online.
But tell them that over at the VVD…
As I look at what passes for responsible economic policy these days, there’s an analogy that keeps passing through my mind. I know it’s over the top, but here it is anyway: the policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue — are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods.
Hey, I told you it was over the top. But bear with me for a minute.
Late last year the conventional wisdom on economic policy took a hard right turn. Even though the world’s major economies had barely begun to recover, even though unemployment remained disastrously high across much of America and Europe, creating jobs was no longer on the agenda. Instead, we were told, governments had to turn all their attention to reducing budget deficits.
Skeptics pointed out that slashing spending in a depressed economy does little to improve long-run budget prospects, and may actually make them worse by depressing economic growth. But the apostles of austerity — sometimes referred to as “austerians” — brushed aside all attempts to do the math. Never mind the numbers, they declared: immediate spending cuts were needed to ward off the “bond vigilantes,” investors who would pull the plug on spendthrift governments, driving up their borrowing costs and precipitating a crisis. Look at Greece, they said.
The skeptics countered that Greece is a special case, trapped by its use of the euro, which condemns it to years of deflation and stagnation whatever it does. The interest rates paid by major nations with their own currencies — not just the United States, but also Britain and Japan — showed no sign that the bond vigilantes were about to attack, or even that they existed.
Just you wait, said the austerians: the bond vigilantes may be invisible, but they must be feared all the same.
This was a strange argument even a few months ago, when the U.S. government could borrow for 10 years at less than 4 percent interest. We were being told that it was necessary to give up on job creation, to inflict suffering on millions of workers, in order to satisfy demands that investors were not, in fact, actually making, but which austerians claimed they would make in the future.
But the argument has become even stranger recently, as it has become clear that investors aren’t worried about deficits; they’re worried about stagnation and deflation. And they’ve been signaling that concern by driving interest rates on the debt of major economies lower, not higher. On Thursday, the rate on 10-year U.S. bonds was only 2.58 percent.