GECO 21-1 The announcements of this December 3rd are worrying.
The European Central Bank reduced its deposit rate from -0.20% to -0.30%. In doing so, it discourages short-term deposits of banks that are too happy to use its balance sheet to ensure a total capital weighting. But she needs bank deposits to finance her massive purchases of the quantitative easing program. That same day Belgium borrows at six months at -0.40%.
In writing this, I measure the absurdity and especially the dangers of the Bermuda triangle constituted by the European banks, the ECB and the Eurozone states. This objective and unhealthy alliance between the three components of Eurozone finance contains a systemic risk that, in the next crisis, will simultaneously explode the three components.
The ECB’s balance sheet continues to grow.
With 2.273 billion euros of assets on its balance sheet, the ECB continues to increase it thanks to a purchase program of 60 billion euros per year whose impact on the real economy is zero. His German colleague, Sabine Lautenschlaeger, has made it clear that there is no longer any need for stimuli. Fortunately, the ECB has resisted the temptation to put a layer on it again. Every $ 60 billion decreases the ability of the ECB to intervene in the event of a sovereign or banking crisis. It is weakening day by day.
The ECB is making the situation of savers more and more catastrophic.
If the leaders of the ECB had the least consideration for savers that would be known. Their expropriation continues. It is no longer possible in the Eurozone of the solid countries (not the southern countries) to obtain the least remuneration for the risk taken by the investor. At the same time, the Federal Reserve will raise interest rates. Investors seeking returns have three choices: investing in the very long term, investing in risk assets, or investing in US securities. Each of these options contains unnecessary risks for the European economy.
Fiscal discipline is disadvantaged by sovereign bonds at zero rates.
France, which exceeds 100% of GDP worries slightly less than Italy with 132%, going to join Greece. But the amounts are unbearable for these two countries: more than two trillion euros each. The situation in Belgium is worse than that of Portugal, Spain or Ireland. Germany has negative interests and only gives a positive rate for ten years or more! Why reduce debt? In a system of negative interests, borrowers take advantage of their loans. Sooner or later this bomb will burst.
The health of European banks is precarious.
It is Washington and the International Monetary Fund that came to the warning: With nearly 1,000 billion euros of bad credit, European banks are summoned to take urgent action. This represents almost 50% of their equity. This is essential for financing any recovery.
Here again, the lack of interest rate discipline facilitates the banks’ lack of discipline in the amortization of these loans. When borrowing on the interbank market at negative rates, why ask yourself problems?
I do not know if the next crisis will come from the bad assets of the ECB, the tumble of Italy and France or a massive need for bank credit write-downs. This is of little importance.
If banks have to write off their loans and borrow more, the states and the ECB will suffer.
If the ECB sees mistrust on the banks or the states to grow, it will not have the means to intervene and its balance sheet will become wobbly.
If governments continue to over-indebt themselves and investors decide to be wary, the ECB and banks are bogging down.