When the facts change, I change my mind. What do you do? -- John Maynard Keynes

Saturday, January 21, 2012

European Banks: Caveat Emptor

Central Bank Becomes an Unlikely Hero in Euro Crisis (NYTimes)
". .  . the European Central Bank, which in late December under its new president, Mario Draghi, quietly began providing emergency loans to European banks — hundreds of billions of dollars of almost interest-free capital that the banks have used to come to the rescue of their national governments. . . . The central bank is preparing another infusion in February, and many banking experts expect it to be even bigger. The unspoken quid pro quo — that banks need to buy government debt in exchange for the central bank’s largess — seems to be working. The strategy is not without risks, warned Thomas Mayer, chief economist at Deutsche Bank in Frankfurt. “It may please some of the purists as it looks purer, but the banks may become addicted,” Mr. Mayer said. There is a limit to how much of this debt the banks can buy, he said. “Near-term relief of government bond deals may come at the cost of making the banks’ balance sheets more toxic. . . .”"

In other words, we have an already toxic situation in Europe becoming more toxic through official central bank policy.  Many of the European banks were already in trouble due to their Eurozone bond holdings, so now they have nothing to lose in taking on more toxic assets? We may be headed for an even bigger bust down the road and have the ECB to thank for it.


The Big Picture

Financial Crisis - The Telegraph

JohnTheCrowd.com | The Sailing Website

Craig Newmark - craigconnects