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Economy
In reply to the discussion: STOCK MARKET WATCH -- Thursday, 19 January 2012 [View all]Demeter
(85,373 posts)92. Zombie Europe
http://www.nakedcapitalism.com/2012/01/zombie-europe.html
One of the major themes that I have been discussing in Europe for a long period of time is the simple failure of logic in which the European periphery is being instructed to push deflationary policy onto their economies, yet at the same time expected to meet their existing, and growing, debt obligations. In the most extreme case this has led to what you now see in Greece, but I dont think Portugal or Spain are far behind. This failing policy is leading to the zombification of nations, in which they cant grow out off their debts yet arent being allowed to fail on them either. Kept alive by an ever-growing lifeline of foreign aid when the real solution is to let the beast die and re-build from the ashes. I think if we compare Iceland to Ireland we are beginning to get a clear picture of the benefits of writing off the debts and starting anew.
As I have also spoken about over the last month or so, what is happening in the real economies of Europe is being replicated in the banking system. This is most apparent in the interbank market, as I said:
What appears to be occurring is that banks are hoarding reserves instead of providing them to the interbank market. If I took a guess I would suggest that this being caused by deposits flowing out of periphery banks into the core (and probably some non-Euro markets). These flows require the periphery banks to recoup some of their lost reserves which they would normally do in the interbank market. If this is correct then appears that the banks themselves have already decided that there are some Zombies in the system. Under these circumstances what should occur is that these banks are identified, assessed and broken up in a structured way in order to purge the financial system of entities that are no longer solvent. Yes, this would mean that investors in those entities would be out of pocket, but that is the risk of investing which is why you get paid a premium. Dividends I believe they are called ! However, as I have stated numerous times, the Europeans appear to believe that the normal tenants of investing need not apply on their continent so we continually see policies implemented across Europe to keep the poison in the patient. The ECBs 3-year LTRO is the latest incarnation of the band-aid to cover the ever-growing wound. Instead of properly stress testing the financial institutions to determine which ones are insolvent and in need of removal, we have an operation by the central bank to provide massive amounts of excessive liquidity. The hope is that this will stabilise the the interbank market and therefore banks will go on their merry way doing what banks do, that is providing credit to the private sector within the bounds of monetary policy.
This approach appears to be failing as, even Mr Draghi has admitted, the interbank market is still frozen. However, even if this wasnt the case I doubt very much whether periphery banks would be falling over themselves to lend because: Firstly the banks appear to be using the facility to re-capitalise while at the same time they shrink their asset base in order to meet capital requirements, and secondly, in a poor economy the appetite and/or desire for credit is low and the availability of credit-worthy customers is limited...
One of the major themes that I have been discussing in Europe for a long period of time is the simple failure of logic in which the European periphery is being instructed to push deflationary policy onto their economies, yet at the same time expected to meet their existing, and growing, debt obligations. In the most extreme case this has led to what you now see in Greece, but I dont think Portugal or Spain are far behind. This failing policy is leading to the zombification of nations, in which they cant grow out off their debts yet arent being allowed to fail on them either. Kept alive by an ever-growing lifeline of foreign aid when the real solution is to let the beast die and re-build from the ashes. I think if we compare Iceland to Ireland we are beginning to get a clear picture of the benefits of writing off the debts and starting anew.
As I have also spoken about over the last month or so, what is happening in the real economies of Europe is being replicated in the banking system. This is most apparent in the interbank market, as I said:
Although the LTRO does seem to have done some good for short term sovereign debt via supporting direct purchases, or at least the perception of them, it doesnt appear to be helping in the area that central bank operations actually target. That is, interbank market stability.
The latest ECB data shows that banks parked a near record 446bn Euro in the ECBs deposit facility, but this in itself isnt a problem. What is the problem is that the increasing use of the ECBs marginal lending facility shows that not all of these parked reserves are actually excess to market requirements.
What appears to be occurring is that banks are hoarding reserves instead of providing them to the interbank market. If I took a guess I would suggest that this being caused by deposits flowing out of periphery banks into the core (and probably some non-Euro markets). These flows require the periphery banks to recoup some of their lost reserves which they would normally do in the interbank market. If this is correct then appears that the banks themselves have already decided that there are some Zombies in the system. Under these circumstances what should occur is that these banks are identified, assessed and broken up in a structured way in order to purge the financial system of entities that are no longer solvent. Yes, this would mean that investors in those entities would be out of pocket, but that is the risk of investing which is why you get paid a premium. Dividends I believe they are called ! However, as I have stated numerous times, the Europeans appear to believe that the normal tenants of investing need not apply on their continent so we continually see policies implemented across Europe to keep the poison in the patient. The ECBs 3-year LTRO is the latest incarnation of the band-aid to cover the ever-growing wound. Instead of properly stress testing the financial institutions to determine which ones are insolvent and in need of removal, we have an operation by the central bank to provide massive amounts of excessive liquidity. The hope is that this will stabilise the the interbank market and therefore banks will go on their merry way doing what banks do, that is providing credit to the private sector within the bounds of monetary policy.
This approach appears to be failing as, even Mr Draghi has admitted, the interbank market is still frozen. However, even if this wasnt the case I doubt very much whether periphery banks would be falling over themselves to lend because: Firstly the banks appear to be using the facility to re-capitalise while at the same time they shrink their asset base in order to meet capital requirements, and secondly, in a poor economy the appetite and/or desire for credit is low and the availability of credit-worthy customers is limited...
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$10 TRILLION Liquidity Injection Coming? Credit Suisse Hunkers Down Ahead Of The European Endgame
Demeter
Jan 2012
#7
Speaking of the skunk, I just meandered over to Automatic Earth and found this.
Fuddnik
Jan 2012
#18
Yeah. What would be the corresponding statistics for the States? The Skunk, you see,
Ghost Dog
Jan 2012
#19
Well, ZH has a tendency to go way over the top, on occasion. The 'soundbite' is based on
Ghost Dog
Jan 2012
#20
I don't really "understand" any of it, Tansy - but I don't think it matters
bread_and_roses
Jan 2012
#62
Not as far back as our reptile brains. Just a hundred and fifty years of Western social progress,
Ghost Dog
Jan 2012
#65
The A-List: Jeffrey Sachs - Self-interest, without morals, leads to capitalism’s self-destruction
Demeter
Jan 2012
#37
Obama's "tax-policy", the new puppet-in-waiting and the collapsed UBS business model.
Ghost Dog
Jan 2012
#87