It has long been pointed out that the prime beneficiaries of the various 'bailouts', including the 'rescue packages' for countries such as Ireland and Greece, have been the teetering banks.
Yesterday the European Central Bank announced the completion of the second phase of its emergency lending programme for 'European' banks. About four months after it provided 489 billion euros of cheap loans it has stumped up a further 529 billion at 1 per cent interest that has been eagerly 'hoovered up' (in the BBC's editor's phrase) by about 800 European banks. (Did you know there were that number of needy banks? I suppose, in Margaret Thatcher's phrase, quoting someone or other, 'the poor are always with us'.) The large number suggests that this time, unlike last, the facilitiy has been made available to smaller banks. Does that mean that that the ECB is now sufficiently confident of it all turning out well that it can extend its largesse pretty well universally, or that the perilious interconnectness of the banking system is now such as to force a redefinition of 'too big to fail'?
Where is the money going? A considerable part of it is being spent on buying European government debt, which of course yields considerably more than 1 per cent.
Spanish banks' holdings of government debt rose by 23bn euros in January. They rose a similar amount in December.
That means they have bought an extra 46bn euros worth of government bonds in the two months since the new ECB loan programme started. That's nearly five times more than they bought in the first 11 months of 2011.
As Julian Callow, of Barclays Capital, has pointed out, that 46bn euros is also the equivalent of more than half of the money the Spanish government needs to borrow this year to cover its budget deficit and maturing debt. So with today's loans, Spain's banks could cover the lot. If they decide to do so.
Spain is just one example. As the man said, we're all in this together. The question inevitably arises, who are 'we'? There is no sign that the newly created funds have benefited what the Americans call 'main street'.
There are other worries too. The ECB calls its operation LTRO, Long-Term Refinancing Operation. Three years may be a long time in banking, or in a senior banker's career, but some are worried whether banks will be strong enough when they have to refinance these loans. Peter Sands, chief executive of Standard Chartered bank, which has made clear it has not used the ECB facility, has warned that we may be 'laying the seeds for the next crisis':
"Banks are still going to have to refinance their loans in three years time. It's not clear what the exit strategy is, nor is it possible to predict what the long-term consequences will be."
There is also quantitative easing. Governments currently are playing down expectations of more but massive programmes have been undertaken by western governments: $2.3 trillion in the US, £325 billion in the UK. For thoughts about the nature of this operation see http://viableopposition.blogspot.com/2012/02/charlie-bean-strikes-again-impact-of.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+blogspot%2FtTbKB+%28Viable+Opposition%29
