Wednesday, 16 May 2012

ECB smoke signals

First came the news that Jens Weidmann is openly arguing for collateralizing TARGET balances in the Eurozone. If you don't breathe and live Eurobabble - in simple words: The head of the Bundesbank now thinks that the risk of a Euro breakup is so high that it wants more than just the word of the Banco de Espana, Bank of Italy, etc. that they will repay all the money they have stuffed into their banking systems. Hand over the assets; this only makes sense if the risk of exit for the Club Med is getting high, in the Bundesbank's view. Ouch.

Now it emerges that the ECB has drastically curtailed lending to Greek banks, partly as a reaction to the fact that the 25 billion € given to Greece to recapitalize banks has not been used for that purpose. Remember that Greeks withdrew about 700 million € last week, after the elections. Without ECB liquidity, the banks will implode. This, to my mind, means the writing is on the wall. The ECB's long-term liquidity program in December last year bought a bit of time for countries that run big current account deficits, but now that Spanish banks are virtually out of collateral that they can post, and with the ECB getting restrictive, everything is set for a rapid unravelling once another small shock or two occur... 

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