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Thursday 22 December 2011
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Telegraph.co.uk Home News Sport Finance Comment Blogs Culture Travel Lifestyle Fashion Tech Dating Offers Jobs Companies Comment Personal Finance Economics Markets Your Business Olympics Business Business Club Money Deals Ambrose Evans-Pritchard Damian Reece Jeremy Warner Richard Fletcher Kamal Ahmed Alistair Osborne James Quinn Home» Finance» Comment» Damian Reece Eurozone zombies follow Mario Draghi's cheap money Mario Draghi donned his plague suit on Wednesday and urged European banks to "Bring out your dead". But rather than financial corpses it was €489bn (£408bn) of zombie debt from zombie banks that emerged blinking into the daylight. European banks face a â?¬600bn tsunami of debt coming due in 2012 (mostly in the first quarter) and many simply can't pay up because the usual source of refinancing, wholesale money markets, are refusing to lend them any more. Sound familiar? Photo: PA7:22PM GMT 21 Dec 2011
Comments
Far from reassuring markets, the scale of Wednesday's bail-out for eurozone banks by Draghi's European Central Bank (ECB) should simply confirm worst fears.
European banks face a €600bn tsunami of debt coming due in 2012 (mostly in the first quarter) and many simply can't pay up because the usual source of refinancing, wholesale money markets, are refusing to lend them any more. Sound familiar?
One Northern Rock-style collapse after another would have reverberated around the eurozone over the next three months if the ECB hadn't stepped in with unlimited cash costing 1pc. Almost certainly there would have been a euro-Lehman moment too as a once mighty lender, probably in France, fell over.
Draghi has had to ignore any sense of moral hazard and agree to fund weak banks at the expense of strong. He has opened a quantitative easing (money printing) exercise of enormous proportions. Weak banks unable to fund themselves on the open market are now hooked on cheap ECB money.
In return they have to post collateral with the ECB, making wholesale money market debt subordinate to the ECB borrowings. These wholesale funds become even more expensive as a result, making it even less likely that eurozone banks can access them in future, thus increasing their addiction to ECB cash.
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13 Dec 2011Banks accessing cheap ECB funds will lend this on to lowest risk credits, such as blue-chip corporate borrowers, to make an easy profit and rebuild their earnings and invigorate their living dead balance sheets. Bonuses all round. They can also subsidise lending to consumers, grabbing market share from stronger banks without the same balance sheet failings.
Nicolas Sarkozy hopes banks will use the ECB's cheap cash to buy sovereign debt from the usual Club Med suspects. But why banks would load up on even more of the loss-making stuff that's caused their capital positions to deteriorate already is unclear.
There is a carry trade potential of borrowing cheap from the ECB and lending dear to Italy but using three-year money to execute that is against most bankers' instincts and there is a clear risk the trade could go wrong in what are hugely volatile markets.
Draghi has avoided a devastating 2012 credit crunch but such a cheap, short-term palliative is no cure for Europe's fundamental problems.
Banks rehearse the euro break-up scenarioSir Philip Hampton, chairman of Royal Bank of Scotland, thinks that while Europe will move heaven and earth to try to keep the euro together, there is a chance it could split asunder with Greece the most obvious first candidate to leave.
If anyone tells you a break-up of the single currency is simply a swivel-eyed eurosceptic fantasy, think again. RBS, and every other sane bank, has a contingency plan for that very eventuality given its increasing likelihood.
Sir Philip's lucid views are included in Jeff Randall's Sky News show tomorrow evening*. Perhaps most intriguingly, however, are Sir Philip's views on exactly how a country, such as Greece, would go about leaving.
damian.reece@telegraph.co.uk
*Jeff Randall's Christmas Dinner Sky News, Thursday 7.30pm
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Comments
Far from reassuring markets, the scale of Wednesday's bail-out for eurozone banks by Draghi's European Central Bank (ECB) should simply confirm worst fears.
European banks face a €600bn tsunami of debt coming due in 2012 (mostly in the first quarter) and many simply can't pay up because the usual source of refinancing, wholesale money markets, are refusing to lend them any more. Sound familiar?
One Northern Rock-style collapse after another would have reverberated around the eurozone over the next three months if the ECB hadn't stepped in with unlimited cash costing 1pc. Almost certainly there would have been a euro-Lehman moment too as a once mighty lender, probably in France, fell over.
Draghi has had to ignore any sense of moral hazard and agree to fund weak banks at the expense of strong. He has opened a quantitative easing (money printing) exercise of enormous proportions. Weak banks unable to fund themselves on the open market are now hooked on cheap ECB money.
In return they have to post collateral with the ECB, making wholesale money market debt subordinate to the ECB borrowings. These wholesale funds become even more expensive as a result, making it even less likely that eurozone banks can access them in future, thus increasing their addiction to ECB cash.
Britain may regret George Osborne's RBS stance
Wanted: new chairman of the Prudential who could be its last
Euro at risk if countries fail to play game of carrot and stick
Christian Noyer is wrong - what France lacks is credibility
Bargaining chip for Britain in Europe
Taxpayers have the right to see the RBS collapse fully investigated
Banks accessing cheap ECB funds will lend this on to lowest risk credits, such as blue-chip corporate borrowers, to make an easy profit and rebuild their earnings and invigorate their living dead balance sheets. Bonuses all round. They can also subsidise lending to consumers, grabbing market share from stronger banks without the same balance sheet failings.
Nicolas Sarkozy hopes banks will use the ECB's cheap cash to buy sovereign debt from the usual Club Med suspects. But why banks would load up on even more of the loss-making stuff that's caused their capital positions to deteriorate already is unclear.
There is a carry trade potential of borrowing cheap from the ECB and lending dear to Italy but using three-year money to execute that is against most bankers' instincts and there is a clear risk the trade could go wrong in what are hugely volatile markets.
Draghi has avoided a devastating 2012 credit crunch but such a cheap, short-term palliative is no cure for Europe's fundamental problems.
Sir Philip Hampton, chairman of Royal Bank of Scotland, thinks that while Europe will move heaven and earth to try to keep the euro together, there is a chance it could split asunder with Greece the most obvious first candidate to leave.
If anyone tells you a break-up of the single currency is simply a swivel-eyed eurosceptic fantasy, think again. RBS, and every other sane bank, has a contingency plan for that very eventuality given its increasing likelihood.
Sir Philip's lucid views are included in Jeff Randall's Sky News show tomorrow evening*. Perhaps most intriguingly, however, are Sir Philip's views on exactly how a country, such as Greece, would go about leaving.
damian.reece@telegraph.co.uk
*Jeff Randall's Christmas Dinner Sky News, Thursday 7.30pm
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