We have already explained that risks to the banking system in Europe remain elevated (read this article). There is another element to consider, one that shows the depth of the crisis : The interbank market is still not working, and the european banks are still under perfusion from the ECB!
In order to face this stalling in the interbank market and the risk of banks defaulting, the ECB had already made two giant loans, in December 2011 and February 2012, of a total amount of a trillion euros on three years at 1% yearly interest. Those were called Long Term Refinancing Operations, or LTROs. A real gift for over 500 european banks!
This giant money printing press brought about some real easing on the debt rates of Italy and Spain. And most political leaders and news editors had concluded that the crisis was over... But no, it was just suspended for awhile.
The banking sector and the European authorities say that the crisis is over. They show this confidence by pointing out that certain banks have started to pay these LTROs by anticipation. But let’s put things in perspective : Up to this moment, only 212 billion euros have been reimbursed, or one-fifth of the total amount, and the rythm of repayment is slowing down, which is worrisome. Citi’s analysts are unhappy about this slowing down and consider it could bring about some doubts on the perspectives of the banking systems of Europe.
Even though the ECB did not make public which banks got the loans and how much each got, we know that the southern countries (Spain, Italy, Portugal, Greece) profited largely from this manna from Heaven. But, alas, their situation is getting worse! The proportion of defaulting loans is dangerously rising, and the banks can only hide this for awhile, but not forever. We can be sure that the banks from those countries will not reimburse their LTROs ahead of time and, one wonders, will they reimburse at all on time? That is not even certain, and the ECB will probably have to do more quantitative easing... again.
Another thing to worry about : The situation, in Italy, is stalled after the last elections, with no clear majority as the outcome. And let’s not forget that more than half of the votes went to candidates who want to exit the euro (Silvio Berlusconi and Beppe Grillo)!
If only the healthy banks are able to reimburse LTROs ahead of time (for only 1/5 of the total), we should be worried about it. In any case, the european banking system remains entirely dependant on the ECB for its daily operations, and this is not good news.
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Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.