The Staggers

The New Statesman’s rolling politics blog

Another credit crunch looms

The threads holding up the balance sheets of the banks are growing perilously thin.

By Ann Pettifor Published 07 March 2012 11:22

The finance sector is signalling alarm, and our politicians are once again asleep at the wheel. Another "credit crunch" may be looming. The most significant evidence emerged from the ECB's second Long Term Refinancing Operation (LTRO) on Thursday last week.

The LTRO is simply language intended to disguise the "printing of money" by the ECB for lending to private European banks at a very low rate of interest - 1 per cent. (In fact, the money is not even printed: it is created by entering digits into an ECB computer, and then transferring hundreds of billions of euros as 'bank money' to private banks.)

The fact that British banks rushed to drink from this punch bowl, tells you something about the state of their balance sheets.

For reasons that I suspect are largely ideological, the British government and HM Opposition refuse to face the reality that our private banking system and large parts of the corporate and household sectors are effectively bankrupt. Given this context - and the grave threat posed by an insolvent private finance sector - the joint and somewhat myopic focus by all political parties on the public debt is surely irrational.

Many households, firms and banks in the private sector are only kept from liquidation by a) "forbearance" - bankers hanging on in the hope that e.g. defaulting mortgage debtors will eventually repay; and b) injections of 'liquidity' by publicly-backed central banks.

But the threads of forbearance and liquidity holding up the balance sheets of the private banking system are growing perilously thin.

The ECB is by law (the Lisbon Treaty) prevented from making low-cost finance directly available to sovereign governments of the Eurozone. Whereas the Bank of England has effectively financed the government's deficit by buying government bonds at very low rates of interest from private banks, Greece and Portugal cannot rely on the ECB to purchase their bonds at low rates. Instead they have to turn to private bankers/financiers - who charge much higher rates of interest. (Readers are free to speculate as to who may have had a hand in drafting the Lisbon Treaty and the ECB's mandate.)

To avert Armageddon in the global financial system last December, the ECB turned the cheap money spigot on - in the vain hope that private banks would lend on low-cost ECB loans to governments. And that they would do so at a rate of interest a little nearer to the 1 per cent the ECB had charged them.

So much for wishful thinking.

This onlending - borrowing cheap and lending dear - is called 'the carry trade', and extremely profitable it is too. Take Portuguese 10-year bonds: private banks are using their 1 per cenr ECB loans to buy these at 14 per cent - a nice, effortless little earner. The case of Greece is of course, worse: the rate of interest the 'carry trade' extracts from Greece for short-term loans is frankly, criminal. Indeed the ECB's easy, cheap money can be said to be helping bankrupt the very governments it purports to help in its roundabout way.

But I digress. Last week big banks as well as many small banks, rushed to suck on the teat of cheap central bank funding. Our very own Lloyds Bank, already largely government-owned, borrowed €13.6bn from the ECB while Barclays, which claims it never relied on public funds, borrowed €8.2bn; RBS borrowed €18bn. In total 800 European banks rushed for help from the ECB.

This is a worrying development.

But even more disturbing are signs that banks no longer lend to each other. Just as the credit crunch of August, 2007 was heralded by a freezing up of inter-bank-lending, so history appears to be repeating itself. According to the FT, banks deposited a record €777bn overnight with the ECB last week, up nearly two thirds from the previous day.

In other words, banks were borrowing from the ECB at 1 per cent and then re-depositing funds with the ECB for less - 25 per cent.

Banks could earn a great deal more in the inter-bank market - but that market scares the hell out of them. They know a lot more about their fellow bankers' solvency than our politicians do. Which is why they are parking their (our) money with a bank that cannot go bust: the taxpayer-backed ECB.

Given that our politicians are looking the other way, this should scare us too.

Ann Pettifor is director of PRIME - Policy Research in Macroeconomics.

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22 comments

Wed, 2012-08-22 05:31 — Daniel Freysinger (not verified)

Your disgusting promotion of this book is disgraceful. You molest an 11 year old boy and think you have a right to make a profit from telling your story. If you were sorry for what you did the proceeds of this book would be going to a victim's fund.

Wed, 2012-08-22 05:30 — Daniel Freysinger (not verified)

Wed, 2012-03-07 11:46 — The Style (not verified)

Let's be clear this is an assualt on democracy by a greedy elite. They want to make themselves wealthier and the governments and the people they are supposed to reprsent are an 'impediment' to their desires. There is a name for people like this-scumbags.

Thu, 2012-03-08 00:10 — FA

If the ECB is providing so much support to banks then clearly politician's AREN'T looking the other way.

Its true that credit conditions are tightening in Europe. But until the Eurozone is resolved this is the "new normal". The financial crisis is simply entering its final phases.

Pettifor's solution to debt - more debt - doesn't hold water.

Fri, 2012-03-09 16:23 — P Spence (not verified)

As Geoffrey Geuens makes clear here-http://21stcenturymanifesto.wordpress.com/2012/03/08/geoffrey-geuens-financial-markets-are-not-caceless-their-face-is-that-of-the-oligarchy/- we are dealing here with the interests of the ruling class. They are not faceless, abstract ideas but real flesh and blood people who happen to have priorities which conflict with most people in the World.

Wed, 2012-03-07 12:46 — mike555

Don't panic, there'll just be another emergency meeting and they'll print a load more money and have another big bailout if anything bad happens.

Makes you wonder why there are ever any economic problems when this is all that's needed.

Wed, 2012-03-07 13:11 — Awake!

'For reasons that I suspect are largely ideological, the British government and HM Opposition refuse to face the reality that our private banking system and large parts of the corporate and household sectors are effectively bankrupt. Given this context - and the grave threat posed by an insolvent private finance sector - the joint and somewhat myopic focus by all political parties on the public debt is surely irrational'

You can't put this line in a movie script- simply too unbelievable.

Wed, 2012-03-07 13:20 — Martin Tavers (not verified)

Even a writer for the Torygraph agrees that this is an assault on democracy.

http://www.spiked-online.com/index.php/site/article/12058/

Wed, 2012-03-07 13:27 — Roger Ramjet (not verified)

@ Awake

Explain why that is please. Thank you in advance.

Wed, 2012-03-07 13:31 — Awake!

Actually apologies, the last comment was harsh...
Indeed. The difference is that in the UK the govt is buying gilts back, whereas in europe the banks are getting to keep their sov bonds (eg the 14% our writer talks about). I believe haircuts have been put in place but still... tax payer backed aid to private banks that otherwise are insolvent. All to support unsustainable levels of spending, so that the rich white westerners can keep insulating themselves from the realities of consequences, the vagaries of the workplace, the cost of energy... why not?? After all, he is the dominant species- he consumes 5 times more than his emerging market counterpart and is 'entitled' to do so...

Wed, 2012-03-07 13:39 — Roger Ramjet (not verified)

@ Awake

It was worth being polite, to my knowledge, that was the most insightful comment you've made here.

Wed, 2012-03-07 13:56 — Awake!

@ Roger Ramjet
why can't one put this in a movie? because interest rates that we pay in the private sector are determined by our sovereign rate, so the govt HAS been and STILL is right to focus it's energies on keeping rates low... Economics is being made up in the last 5 years, QE wasn't a given that it would work and time will tell where we end up with it(my bet is we will have high inflation for a while, the tightrope is not to get hyperinflation). Too many people still don't get this basic PRIMARY risk facing our economy.

Wed, 2012-03-07 14:00 — Beryl Linberg (not verified)

Not so fast with the praise Roger:

Craig Murray has a quick explanition of why buying gilts/QE is far from a great thing. Ecomonics needs to be understood in a social context. I'll draw your attention to this quote, you can see the rest of the short article at the link below.

"Why would banks want to cash in gilts? Gilts are already perhaps the most liquid asset you can hold, other than cash, in the classic definition of liquidity that they can be easily sold without much affecting their value. On top of which, these same financial institutions are actually still buying bonds from the Bank of England on a regular basis, which would make the process pointlessly circular. And the current Bank of England bonds the banks are buying pay historically low rates, almost certainly lower than any gilts they are exchanging under Q.E.. Why would they do that?

The only sense I can see is that the Bank of England is giving cash in return for junk, and the gilts line is a cover."

http://www.craigmurray.org.uk/archives/2012/02/the-mystery-of-quantitive...

Thu, 2012-03-08 11:45 — mittfh

Surely the real problem with the current financial problems is that we (individuals, organisations, governments) have become too reliant on the financial services sector as a means of providing us with money on demand. So when it emerges that the financial services sector haven't exactly been angelic and are in serious financial trouble themselves, we're left with the unenviable choice of either allowing them to fail (and the money deposited in them being used to pay off their debts - presumably also with the administrators chasing those who've taken out loans to repay them asap), or injecting money to keep them afloat.

Of course, the big irony is that the same organisations responsible for selling us the message of cheap money on demand are the ones governments have entrusted to get us out of this mess - the credit ratings agencies in particular are squeezing governments to reduce their debt asap while other branches of the sector are also encouraging governments to spend lots of money on keeping their sector afloat.

Thu, 2012-03-08 12:39 — Privet (not verified)

any guesses about where house prices will go in next few years?

Fri, 2012-03-09 20:33 — matthew fox (not verified)

Privet, I will give you a clue, they will be lagging behind petrol and diesel price increases.

I want to see how the Right can stomach £2.00 a litre.

Sat, 2012-03-10 18:54 — mike555

@Matt

Glad to see your computer hasn't broken. What effect did you think the tripling of house prices under New Labour had on the poor and low paid?

Thu, 2012-03-08 15:46 — Steve A Mizera (not verified)

What. Me worry?
I will curl up and read From a Dime a Dozen
To Priceless available at:
Www.vistagraphs.net/dime.html
Enjoy.

Wed, 2012-03-07 18:12 — Ann Pettifor (not verified)

Er...there is an error in the piece, and not sure that it was mine. I blame the software...Banks are borrowing at 1% and then depositing that money for only 0.25% at the ECB. The dot seems to be missing from above...

Fri, 2012-03-09 11:51 — General Election Now! (not verified)

The banks are not effectively bankrupt they are completely, totally and utterly bankrupt. In the UK alone they went down with £6.7 trillion of liabilities on their books that we know of. That is many, many, many more times UK GDP which is why the state will go bankrupt long before the banks are remotely near functional re-capitalisation. It is in fact an impossibility and absurd to even try. The global liabilities of the world's banks are estimated at 30 to 40 times that of world GDP. It would take the resources of ten Earths to grow out of this debt which is why cynical governments are not even bothering to try but simply printing, borrowing, and imposing austerity in an effort to grab what they can while they still can and channel it to the super wealthy owners of those liabilities whose sole and only concern is to remain super rich even at the expense of the billions. Global depression from which there can be no escape will be the result with an increasingly few super-rich lauding it over an increasingly impoverished population.

Wed, 2012-03-07 18:45 — Kay Fabe (not verified)

It should be remembered that Barclays got lots of money from AIG and so was effectively bailed out by the American taxpayer. It didn't get any money from the public in the UK, true, but it got billions from the Americans.

Wed, 2012-03-07 20:39 — Denaliguide (not verified)

fairly simple. Makes each currency unit worth less, by a like amount. It amounts to counterfeiting which you or I would get jailed if we did. Hold gold, silver or things of value. Either that or watch anything denominated in currency vaporize.
http://www.denaliguidesummit.blogspot.com/