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Wednesday 29 February 2012
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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 Home» Finance» Financial Crisis European Central Bank's cheap money has just turned toxic banks into zombie banks Last year a well-known senior former investment banker travelled around southern Europe’s troubled banks offering them a simple trade. ECB president, Mario Draghi, has effectively transformed the eurozone's toxic banks into zombie banks, addicted to his supply of cheap credit to keep them alive. Photo: AFP12:06PM GMT 29 Feb 2012
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He knew their balance sheets were stuffed with billions of euros of toxic loans. He also knew the banks could neither afford to finance these assets any longer, nor had enough capital to recognise the full-scale of the losses they would have to take to sell them.
Meeting with the banks he offered to buy not the odd loan here and there, but their entire toxic portfolios. The catch: well he wouldn’t offer them the face value of the loans, not even close, but he’d pay enough that it would be at a level where the bank could take a manageable loss.
Everything was going well until December when the ECB launched the first three-year long-term refinancing operation, or LTRO, which saw eurozone lenders borrow €489bn (£414bn) from the central bank at a 1pc interest rate.
Almost immediately the banker’s calls stopped being returned and meetings were cancelled. Buoyed by the ECB’s cheap money, the impetus for the previously cash-strapped banks to offload their toxic assets was removed and they were now in a position to adopt a wait and see approach.
I do not expect many people to feel too sorry for the banker, but what his story demonstrates is the profound effect the ECB’s LTRO borrowing programme, which today has lent a further €530bn to eurozone banks, has had on the recipients behaviour.
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29 Feb 2012Losses that might have been recognised sooner will now be taken later. Problems that were on the cusp of being dealt with have been bought off for at least the next three years.
ECB president, Mario Draghi, has effectively transformed the eurozone’s toxic banks into zombie banks, addicted to his supply of cheap credit to keep them alive.
Across Europe hundreds of banks open their doors every day only because of Mr Draghi’s intervention. These lenders may look like banks, call themselves banks, and, to their customers, feel like banks, but they are in reality wards of the ECB, going through the motions of banking.
These banks can make little impact on the real economy, and their main purpose in life is merely to survive and maintain the status-quo. They cannot afford to make loans and be the agents of Europe’s economic recovery as they remain too bloated with toxic debt and are, to all intents and purposes, insolvent.
In Italy, Spain, Portugal and many other European countries, small and medium-size lenders, and many larger banks too, have tens of trillions of toxic debt still on their balance sheets. The ECB loans have bought time to begin fixing these problems, but it is not a cure in and of itself.
Unpalatable as it may be, the European banking system’s toxic debt burden will not begin to be solved until lenders are forced to make the scale of writedowns that banks in Britain and the US have done over the last four years.
Be under no doubts, the European banking system remains broken at its core. The LTRO is merely the full body plaster cast hiding the cadaver inside.
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