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Dollar borrowing costs add to strain on European banks - FT.com

European banks are facing increasing strains on their balance sheets because of the dramatic jump in the cost to borrow dollars, essential for some institutions as they need to repay loans in US currency.

The cost for European banks to swap euros into dollars has jumped fivefold since June, hitting the highest levels since December 2008, and raising the risk of insolvency in the region's financial sector.

Strategists estimate European banks face a $500bn dollar funding gap - the sum they need to repay loans and obligations in the US currency over the coming months. The extra cost to swap euros into dollars, therefore, could make the difference between survival and bankruptcy for some institutions, strategists warn.

French banks, especially Société Générale, have been hit hard by a drying-up of US-based dollar liquidity, as money market funds have retreated from eurozone banks. That, in turn, has depressed their share prices, already jittery due to the lenders' outsized Greek exposures.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Sun Sep 11th, 2011 at 12:17:19 PM EST
[ Parent ]
But they planned for this. They knew that the lack of a solution to the sovereign debt problems would eventual result in a loss of money market fund investment. Right?
by Upstate NY on Sun Sep 11th, 2011 at 09:44:06 PM EST
[ Parent ]
If you say so.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Sep 12th, 2011 at 01:14:32 AM EST
[ Parent ]
What, you're telling me the ECB allowed the Eurozone banking sector to accumulate massive US$ liabilities without building up a reserve base of comparable size with which to act as a lender of last resort in US$?

Of course, accumulating reserves would have required "printing" Euros and that would have been inflationary.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 02:14:55 AM EST
[ Parent ]
Remember that most lending is done by banks via borrowing 6-month dollars on the inter-bank market and on-lending it to their clients. They build reserves on the risk of the client not paying them back, but they do not build reserves for the risk of not-rolling over their funding (which is a liquidity risk, in that case).

Wind power
by Jerome a Paris (etg@eurotrib.com) on Mon Sep 12th, 2011 at 03:23:40 AM EST
[ Parent ]
Right, and if access to the USD interbank market becomes a problem for Eurozone banks, you have a 6-month span of USD liquidity pain. Back in 2008 those European banks that could access the UD Fed's liquidity facilities took advantage of it, but that has become politically contentious ("what is the Fed doing lending taxpayers' dollars to foreign banks?").

Liquidity provision to Eurozone banks is the job of the ECB. But liquidity provision in USD is not something the ECB can do without putting the Fed in a political bind (currency swaps by the Fed were construed as "lending" in a famous US House session) and it cannot be done in unlimited amounts regardless. So the ECB would have done well to accumulate enough USD reserves to back the USD interbank liabilities of the Eurozone banks. If the total size of the USD funding needs of the Eurozone banks stays roughly stable or grows non-bubblyly, this should not be a problem.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 04:14:05 AM EST
[ Parent ]
Grayson's Fed exchanges have become small sensations online; a May grilling of the Fed inspector general approaching a million views on YouTube and roughly another million on other video players.

His most recent battle with Bernanke, which is already on its way to 100,000 views, was fought over the Fed's project of "central bank liquidity swaps." The Huffington Post first reported the swaps in March. In response to the global economic crisis, the Fed has injected hundreds of millions of U.S. dollars into foreign central banks in exchange for foreign currency. The swaps represent a radical intervention by the Fed in the global money supply but have barely been covered by the media. They are done without approval from or oversight by the Congress or the White House.

Bernanke, asked by Grayson what the central banks did with the U.S. money, replied: "I don't know."

with video...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 04:31:11 AM EST
[ Parent ]
It's still a US issue because the big US banks don't like to lend (they underwrite bonds and sell them to investors) and quite a bit of lending in the US to US companies is done by European banks...

So if they don't have the liquidity, they'll stop lending in the US.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Mon Sep 12th, 2011 at 11:36:14 AM EST
[ Parent ]
Maybe that inconvenient little fact needs to be pointed out to US Congressmen. Namely, that American investment banking is not into lending but into intermediating...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 12:02:31 PM EST
[ Parent ]
No secret the US banks are intermediaries.  

The consequences of the knowledge is "secret" only in the sense no one wants to 'go there' as it would halt the merry-go-round.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Sep 12th, 2011 at 04:00:37 PM EST
[ Parent ]


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