The Wall Street Journal has a good piece on the growing reliance of European banks on the European Central Bank:
As such, ECB lending to the banking systems of Portugal, Ireland, Greece and Spain rose by €126 billion ($162.45 billion) in the first half of the year, accounting for almost all of an overall increase of €141 billion. Overall ECB lending volumes have fallen since June, with the repayment of €442 billion in 12-month funds. But by the end of June, these four countries accounted for 42% of the ECB’s total lending of €870 billion, up from 33% at the start of the year. By contrast, those countries contribute only 13% of the ECB’s capital.
To some degree, that development reflects a fear of country risk, rather than bank-specific risks. The public-debt dynamics of Greece and Portugal in particular have convinced many that a default or restructuring will be necessary before long. But it also reflects the fear that even sovereigns themselves won’t be strong enough to save and recapitalize national banking systems that have suffered massive losses as real-estate bubbles exploded in their countries.
The European response to the financial mess has been entirely made in America, and our response was borrowed from the Japanese. Remember as the Greek problem hit critical mass, Mr. Geithner flew over to Europe to get them to release “stress tests” to show all was fine. Now the “stress tests” conducted in the Spring of 09 in the US were a charade, as has been pointed out repeatedly by Yves Smith and others. They were the foundation to the Fed/Treasury’s “extend and pretend” policy which allowed the banks to not account the massive loses still on their books, in the hope of some fine day values would once again rise to their bubble heights. From repeatedly leaks, it seems the Europeans are having a problem with “extend and pretend”, as several banks are rumored to not having passed the “stress test”, meaning, Mr. Geithner must be on the phone late at night explaining if they don’t pass that test, give them another one they can pass.
We’re a year and half into our “extend and pretend” policy, the Japanese tried it for seven years until realizing they needed to do something else, that is, make the banks take the losses. There’s many problems with “extend and pretend”, I’ll give two. First, it doesn’t matter how much the banks make trading, see Morgan Stanley’s latest results, the problem is the banks don’t want to do what’s necessary for the real economy, because they’re sitting on piles of garbage. We can all pretend the banks aren’t insolvent, however, the banks understand they very well are.
Secondly, bubbles cause tremendous malinvestment in the economy, and this bubble was a duzy. Keeping the bad loans on the books, focuses the banks on trying to make them good, it encourages the wrong-headed idea that the bubble can be re-inflated, thus keeping the economy itself in check. Further, keeping alive the bad loans creates bad money, gradually undermining currencies themselves. Simply throwing more and more good money at bad debt, increasingly devalues money itself.
The first step we need to take is write-off the bad loans, a massive restructuring of global debt. It is a first step, and really a small first step to begin the restructuring of the economy necessary for future economic health.
Cross-posted from on banks and bubbles
Archein