The banks that are parking their money [about €1 trillion] at the ECB receiving only 0.25% interest are clearly not the same ones that are taking out three-year loans [€1.15 trillion] at 1%. The deposits come largely from northern European banks mainly German and Dutch, and LTRO loans go largely to banks in southern Europe mainly Italy and Spain. In other words, the ECB has become the central counterparty to a banking system that is de facto segmented along national lines. The real problem for the ECB is that it is not properly insured against the credit risk that it is taking on. The 0.75% spread between deposit and lending rates yielding €7.5 billion per year does not provide much of a cushion against the losses that are looming in Greece, where the ECB has €130 billion at stake.
Not Out of The Woods Yet: Despite Progress, Euro Crisis Is Far From Over – SPIEGEL ONLINE
Christian Rickens: So has Greece been rescued and financial markets been tamed? Is the euro crisis a thing of the past? Unfortunately not. With their successes in the last few days, euro-zone politicians have done little more than bought themselves time. They must use this window to brace themselves for the next wave of the euro crisis which is about to crash down on Europe.
It’s already clear that the Greek economy can’t survive with a government debt to GDP ratio that will — at best — still be at 117 percent in 2020, especially given the record pace at which the country’s GDP is contracting. There is still no coherent strategy for making Greece competitive again inside the euro zone, or for raising the capital for the huge investments needed — let alone for the wholesale revamp of the country’s entire public administration.
And so Greece is likely to report the next set of disappointing budget figures in a few months, and the wrangling over a new debt cut and a new rescue package will start shortly afterwards……
The other euro-zone governments have at most a few more months, perhaps only a few weeks, before the situation in Greece worsens again……That means that Portugal, Spain and Italy, the three other problem countries in the south of the euro zone, must perform the magic trick of stimulating growth while reducing their budget deficits. That can only succeed with a lot of pragmatism — austerity without growth is as pointless as growth without austerity.
Heard on the Street: China Shifts Out of Dollars, World Doesn’t End – WSJ.com
In the 12 months to June 2011, dollar purchases accounted for just 15% of additions to China’s reserves.
That confirms hints from Beijing and Europe over the past year that China has ramped up purchases of European debt
via Heard on the Street: China Shifts Out of Dollars, World Doesn’t End – WSJ.com.
EconoMonitor : Note from Athens: Feeling on the Ground Has Palpably Changed
Despite the clear sense of despair and anger in Greece, politicians and members of the public continue to think that the alternative—default and EZ exit—would be even worse.
……Among the increasingly popular fringe left- and right-wing parties, the only party actually advocating a EZ exit is the communist party, or KKE. The KKE will have just over 10% of the vote in the election in April according to most estimates and refuses to cooperate with any other parties in a coalition. For now, the rest of the political establishment advocates doing whatever it takes to remain in the EZ.
….. most Greeks express desperation to stay in the EZ. This is reflected in recent opinion polls: according to a poll conducted in February for Skai TV and Kathimerini, 70% of respondents said a EZ exit and return to the drachma would make Greece’s situation worse and 61% said they viewed the euro favourably.
via EconoMonitor : RGE Analysts » Note from Athens: Feeling on the Ground Has Palpably Changed.
ECB Allots €529.5 Billion in Long-Term Refinancing Operation – WSJ.com
LONDON—The European Central Bank said it handed out €529.5 billion $712.7 billion in cheap, three-year loans to 800 lenders, the central bank’s latest effort to arrest a financial crisis now entering its third year. Wednesday’s loans were on top of the €489 billion of similar loans the ECB dispensed to 523 banks in late December. The ECB’s goal is both to avoid an escalating crisis as banks struggle to pay off maturing debts and to mitigate a sharp pullback in bank lending to customers across ailing European economies……about two-thirds of the loans went to banks in three euro-zone countries — two in the “periphery,” likely Spain and Italy, and one in the “core,” likely France or Germany.
via ECB Allots €529.5 Billion in Long-Term Refinancing Operation – WSJ.com.
The World from Berlin: ‘Europe is Pouring Money Into a Bottomless Barrel’ – SPIEGEL ONLINE – News – International
In an interview with SPIEGEL published on Monday, [Interior Minister Hans-Peter Friedrich] said: “Greece’s chances to regenerate itself and become competitive are surely greater outside the monetary union than if it remains in the euro area.” He added that he did not support a forced exit. “I’m not talking about throwing Greece out, but rather about creating incentives for an exit that they can’t pass up.” It was the first time a member of the German government called on Greece to leave the currency.
Europe Reaches a Greek Deal – WSJ.com
Greece ended months of uncertainty as it secured a new bailout and debt-restructuring agreement during a marathon negotiating session of euro-zone finance ministers, but the deal leaves unanswered questions about whether Greece will be able to meet the terms of the accord……
Officials said the meeting, which lasted nearly 13 hours, produced a plan that would reduce Greece’s debt to just over 120% of gross domestic product by 2020.
Default Therapy
Why not let an insolvent debtor default and invite capitalism to do its work?
That’s the process an Austro-Hungarian economist by the name of Joseph Schumpeter used to call “creative destruction”…and it has worked pretty well over the years, believe it or not…….
Consider the divergent fates of two countries that came face-to-face with a financial crisis in 1990. One of these countries is still merely muddling along…20 years later! The other country is flourishing.
That’s because one of these countries, Japan, responded to its crisis by coddling its crippled corporations and by throwing monumental sums of taxpayer dollars at failing financial institutions. The other country, Brazil, responded to its crisis with relatively savage measures. It defaulted on its debts, devalued its currency (more than once) and did not stand in the way of corporate failure. Brazil’s responses were far from perfect, but they were much less imperfect than were Japan’s……
Too bad for Japan. Its economy has muddled along for two decades, while its stock market has produced a loss of 2% per year across that entire 20-year timeframe. By contrast, the Brazilian economy and stock market have both boomed during the last two decades, despite some very serious bumps along the way.
via Default Therapy.
Greek death spiral accelerates – Telegraph Blogs
Ambrose Evans-Pritchard: This is what a death spiral looks like. It is what can happen if you join a fixed exchange system, then take out very large debts in what amounts to a foreign currency, and then have simultaneous monetary and fiscal contraction imposed upon you.
Germany discovered this on the Gold Standard when it racked up external debt from 1925 to 1929 (owed to American bankers) in much the same way as Greece has done.
When the music stopped – ie. when the Fed raised rates from 1928 onwards – Germany blew apart in much the same way as Greece is blowing apart. This is not a cultural or anthropological issue. It is the mechanical consequence of capital flows into a country that cannot handle it, as Germany could not handle it in the late 1920s.
How to Fix Europe’s Banks – WSJ.com
Francesco Guerrera: A simple solution is staring the likes of Deutsche Bank AG, BNP Paribas SA and Banco Santander in the face: large, decisive, increases in capital through equity sales that would allay investor concerns and boost balance sheets. With the year-end results almost all out of the way, banks should start raising capital soon. The experience of the U.S. financial crisis shows that in stressed times capital infusions can cure or mask many ills and buy valuable time to restructure businesses.