Thursday, 22 December 2011


The European Central Bank has just lent 500 billion Euros at a concessionary interest rate to European banks against low grade security. There was an even greater rush than expected from the banks to apply for the money. As I understand it, the motive was that European banks currently have liquidity (or is it solvency?) problems and American banks are unwilling to lend to them directly. The ECB and European national central banks had a little while ago struck an arrangement with the US Federal Reserve to supply dollars to Europe.

However the ECB is unable to determine what the banks will do with these new funds. The operation is about saving the commercial banking system rather than directing the way in which it operates. Banks might, it seems:

a) lend them to private and commercial borrowers;

b) hold on to them in order to increase their solvency;

c) use then to buy up high-yielding and therefore risky debt such as the bonds of economically stressed European states

d) use them for some even more clever ploy that the rest of us have not even thought of.

It's up to the banks, not the Bank. If they use them to buy up stressed European nations' bonds, (c), there will be a short and shallow sigh of relief but the inter-connection between vulnerable banks and vulnerable nations will be knit a little closer and the wonderful construction of financial instability raised to a slightly greater height.

A couple of weeks ago the international accountancy firm Deloitte estimated that the total value of 'non-core and non-performing assets' held by European banks (i.e. candidates for the kind of operation just carried out by the ECB) is 'at least' 1.7 trillion Euros. Deloitte reckoned that in the previous twelve months (before this latest ECB intervention) banks had managed to dispose of about 60 billion Euros worth. Without the ECB's deus ex machina it would have taken 28 years at that rate for the banks to get rid of their unwanted assets.

Of that European total the largest national holding was in the UK at 536 billion, closely followed by Germany at 522 billion. UK GDP in 2010 was approximately 1720 billion Euros, whilst German was 2536 billion. Italy the new sick man of Europe, with a GDP of 1572 billion (but with a third more industrial manufacturing than the UK within that total - woodworkers, much like handbag owners, know that their machinery has little chance of being manufactured in this country but may well come from Italy) had only 102 billion of these assets in their commercial banks' hands. Of course, these are only estimates, by an organisation not without complicity in our financial travails, of figures that banks are careful to conceal.