Alsacien, where has the €489bn come from?

Discussion in 'Economics' started by whitecity, Dec 21, 2011.

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  1. Alsacien,

    Where has the €489bn come from that the ECB has just 'lent' to all those banks?

    Was it printed money - or as they like to call it now QE? Or was it money deposited, and if so, who deposited it?
     
  2. Alsacien

    Alsacien LE Moderator

    Well despite the myths about the ECB being short of readies, the opposite is true. The place is creeking under the weight of assets, probably somewhere in the region of 4-4.2 trillion. There is also 10,000 tons of gold in the Eurozone (I think UK has about 300 for comparision), so getting leverage is really not an issue either.
    This LTRO was a great success, everyone was expecting up 300bn, so nearly 500bn is a real result - these are all secured loans of exactly 3 years (with a pay back option at 1 year), tracking the base rate which is currently 1%. But there was no limit set, any amount that could be secured could be borrowed.
    The big take up is significant. Even when you look at a worst case capitalisation scenario for Eurozone banks in terms of their financing and capital reserve needs next year, you end up with a figure of around 400bn, and a realistic figure of 150-250bn. So banks are borrowing dosh that they will not be sticking in their cellar, or back in the ECB's cellar, which means they intend to put it to work.
    I went to a presentation by Draghi a couple of weeks back where he explained the rational behind the 36 month LTRO.
    The board at the ECB concluded that governments can sort their own lives out, but the banking needs are within the ECB's remit. To summarise 1 hour into a sentence or two; for all banks with good collateral assets, solve liquidity needs and capitalisation needs (interbank lending has dried up completely, markets are squirrelly); make cheap money available so banks are encouraged to lend to SME's (typical loan periods do not exceed 24 months); encourage banks to invest in government bonds which are a good investment asset that can be reused as collateral.

    Some banks will be in the kak, about only because they are so over exposed compared to their collateral they should not be able to survive anyway.
    SME lending will not be really visible for 6 months, and any real growth 12-18 months away.
    Government bond purchasing is a bit more optimistic, and Draghi flagged that - but the indicators yesterday were good. There will be another 36 month LTRO I think in Feb, which bonds can be used to secure, so it will be interesting to see if banks go for it in the next couple of months.
     
  3. Thank you for this, but you missed answering the question. Or, to be more precise, not divulged who has deposited that 4 trillion of assets. I accept that the exact answer will probably run into LONG list of names, but I'm just trying to guage what proportion of that amount has been deposited by EU zone governments.

    I mean, ECB makes cheap money available to banks with the hope that a significant proportion of that cash will then be used to buy up sovereign debt. Do the banks go for the safe option and support German Bunds or take the riskier but highly profitable option of buying up Italian, Spanish or Greek debt? Whatever option they take, they make a profit - assuming the debt doesn't go bad and they cop a haircut. In effect, taxpayers will be putting more cash into bankers pockets for, what appears to be, a political decision that the ECB is not permitted to 'lend' (or better still let them have their own cash back) to EU sovereign states.

    Any thoughts? Comments?
     
    • Like Like x 1
  4. For Gawd's sake don't get me started on our gold reserves..................

    Odo
     
  5. Mmm, I remember Gordon 'Tosser' Brown boasting that he'd bought Euros with some of the proceeds of flogging off our gold reserves. Admittedly the € was doing ok at the time and he said it in his special 'I'm a genius don't you know' voice, but really?
    What an unimaginable berk.
     
  6. Alsacien

    Alsacien LE Moderator

    I think about 5bn was the operating capital supplied by the Eurozone governments to set up the ECB, that is it as far as I know.
    About 2 trillion are held ECB assets, and the same again in ESCB assets held by the NCB's in the Eurozone countries. Think of them like giant pawn shops, with a very big list of customers.

    The banks have a vested interest in buying their own national bonds rather than go cross border, so I imagine pure speculation not to be more than 10-20%.

    IF the ECB was allowed to lend to governments I do not think it would unless the fiscal discipline was in place and believed in.
    Take the example of the BofE.
    They have bought £200billion of UK government bonds, which opens several issues which only balance out in risk terms because:
    This UK government got the message, fiscal discipline is planned, being enforced and there seems no reason to think they will not stick with it.
    3.5 years with the government not likely to change to Brown II.

    This has brought servicing UK debt down in price, but at the point inflation starts to run away, someone will have to pull £275 billion out of the economy, preferably without impact. Another £75 billion is going in around March most likely.
    With every country in Europe either just above or just below the recession threshold, inflation is not the most pressing concern - lesser of several evils.

    It will be interesting to compare the impact of UK QE to the ECB 3 year LTRO in terms of inflation and growth figures, but it may be hard to separate from all the other chaff for the next 6-9 months.

    Edited to add:
    I just re-read the above and thought maybe it is still not clear.
    The ECB just simply create the credit in the requesting banks account as they have the assets to cover it.
     
  7. Hmmm!

    Apologies for layman terminology.

    What you write is starting to take on an even more worrysome hue if I understand you correctly.

    As far as I'm concerned, and you may have already had the misfortune of reading on ARRSE, the current global mess is a based upon greed and selfishness in society. The majority used 'cheap' money to fuel over-lavish lifestyle choices beyond their means. Politicians fueled and encouraged the delusion. Bankers oiled the machinery and happily lined their pockets.

    Putting aside my ramblings on societal failures and political greed, one of the key elements of the financial/banking collapse of the past few years was very much self-inflicted by bankers with financial trickery. It wasn't just the 'cleverness' of repackaging good and bad debt together as top-grade investments - but the idea that they could slip those loans across the balance sheet and into the asset column. Banks found a way to lend money backed by 'assets' which were, in reality, just more 'lend money' that they'd bought off somebody else.

    And now they're at it again.

    And, although I understand the basis of QE acting as a lubricant to growth, it is the pursuit of 'growth' as the holy grail - especially growth by consumer spend/debt - that has got us into the mess in the first place.

    However, 'long'-term these financial models that are floating around the banking world claim to be, I have the sense that they are nothing more than yet another layer of bandages being strapped round a broken society, measures that allow short-term politicians to avoid making tough decisions and another scam for the banking industry to profit.
     
  8. Alsacien

    Alsacien LE Moderator

    Well that is the world we live in, artificial in financial construct and deeply flawed.
    The derivatives market alone is 10 times bigger than the entire worlds GDP, go figure.....

    I don't think there is a solution, except to chip away with regulation to contain the impacts of something that is basically uncontrollable......
     
  9. Mmmmm..even before I read your reply I thought it was a 'in denial' technical ramble..I've gone through his posts over the last couple of years..the 'luxenberger' is 'crabbing'..but hey I'm just a 'Joe' who has to pay the bills..but should the 'backlash' come..'strange fruit'...
     
  10. Simple, you, as the European central bank, can simply pull the money out of your arse, just as the Federal Reserve does. For the rest of us, the mere mortals who foot all the bills, it's called inflation.
     
  11. There is a solution. But that solution means the masses getting to grips with the fact that we are simply not as well off as we think we are and that riches (for the masses) will only come with long and hard work. We cannot expect cheap products AND high wages. The trick of exporting manufacturing to cheap labour zones was a clever short term con that will result in the next 3 generations having to pay off the current generations greed. When will people learn that that all the imaginary wealth the UK created and circulated within its service industry consumer spend/debt boom is now sitting in Far East vaults.

    Alsacien, I find your posts informative and interesting. However, I'd be grateful if you would add the odd healthwarning to them along the lines of, "although I suggest the financial apocalype is not going to come any day soon, the truth is, we're only creating another lie to hide the other lies that you've been fed. The hospital is running out of bandages."
     
    • Like Like x 3
  12. how can the derivatives market be 10 times bigger than the GDP of the world ? thats insane. where did you get that from ?
     
  13. This post is bang on.
     
  14. Alsacien

    Alsacien LE Moderator

    I don't big negative and I don't do big positive - I'm not in the media, I'm not a politician, and I am not allowed to make any direct money out of it, so I don't have anything to gain by it - but I do have to try and deal with it.

    We are seeing the limits of political consensus acting to reduce the exposure of the ordinary Joe to the financial world. UK won't except any regulation putting its risky financial industry first and foremost, other EU politicians are not much better and put their local issues first and play at scoring points before actually sorting anything out. As long as we have political structures designed around short to medium term returns and re-election, what will happen? Does not bode well for radical change....

    There is no black and white answers to most dimensions of the situation, opposites can both be right. My start point is always figuring out what is not possible for practical reasons, when figuring out what may or may not be possible within those parameters.