Banks get trillions and the unemployed ECB’s love…

Johannes Hahn, Member of the European Commission in charge of Regional Policy, participated in the Conference on European support for SMEs for the period 2014-2020, organised in Brussels. Launched in May 2013, the new single portal on EU finance provides easy, complete and up-to-date information on how entrepreneurs and SMEs can access over €100 billion of EU financing from various EU programmes. Unfortunately this is not like that. National government bureaucracy and banks hold back all those pompously advertised credits.

To understand the kind of world we live in it suffices to follow the way the banks make their billions. Let’s start from the repercussions from the great credit crunch of 2008-2009 which still haunt our everyday lives in Europe and the US but no bank has come close to pay the price for their crimes, with the exception of Lehman Brothers. This last money shark however had broken all laws of nature to such an extent that enraged its peers, who decided to let it go. Reportedly the American taxpayers spent more than $11 trillion and their European counterparts another €4.5tn to support the banks operating in the north Atlantic financial volume. For reasons of comparison the combined annual GDP of the European Union and the US is around €24tn.

In reality this is the only part of the money that lenders received for free from taxpayers, that can be accounted for. There is much more that cannot be accurately counted. This last part is the money central banks in the US and Europe spent to support the liquidity of banks and comes also to the area of trillions. Those are zero interest rate loans handed mainly to American banks. The ECB has restricted its own contributions to banks to anything around €2tn. The American banks spread the money they got all over the world ‘investing’ it on every possible and impossible market, from Turkey’s sovereign bonds and Brazil’s eucalyptus plantations to Eurozone’s risky bonds. When they needed more they just asked the US Federal reserve, the Fed.

This arrangement yielded to US banks immeasurable profits and helped them recapitalise adequately. This strategy was not followed by the Europeans for many reasons; not until now. To understand the way this system worked for the US banks a good example is the Turkish state bonds. This debt paper offers a net yield of at least 8%. At the same time the American banks pay zero interest rate to the Fed for this money, so at the end of the year the lenders make a net 8% profit on the their Turkish investments. The same is true for their Italian, Spanish and Portuguese placements on sovereign debt of those countries leaving a net margin of at least 6%.

Profits around 25% on trillions

As a result in three years the American banks have gained anything between 20% and 25% on the money they got from the Fed. Unbelievable profits, isn’t it? That is how they recapitalised themselves so quickly. Unfortunately for the banks this ‘quantitative ease’ of the Fed however cannot go on indefinitely. The world cannot keep producing so large real profits for the banks, on their investments financed with nothing more than freshly printed paper money.

For this reason the Governor of the American central bank, Ben Bernanke, has recently started talking about holding back this relaxed printing attitude. His statements sounded the alarm all over the world and more so in Eurozone. The American banks have placed trillions in Europe, and according to information they were ready to ‘invest’ another $20 trillion, if the Europeans wanted and the Fed continued to accommodate their demands.

Bernanke’s comments about holding back this ‘quantitative ease’ had very negative effects though on all stock exchanges around the globe. This is a financial world accustomed to easy trillions. No major bank is ready to start sweating its way to profits through commissions on services delivered to the real economy. In view of this negative reactions from the world’s money sharks, Bernanke yesterday reassured them by saying that finally he is not to hold back on easy money handouts. The Fed is pumping into the system $85bn a month. He clarified that the “highly accommodative monetary policy for the foreseeable futures is needed for the US economy”.

The turn of ECB

In any case the big European lenders felt unease with the initial Bernake’s comments about restrictive monetary policy. The European financial system is currently oiled well with plenty of American dollars. If they are to be withdrawn there has to be a replacement. So Eurozone’s lenders asked and the ECB quickly responded with a completely new policy principle, the main characteristic of which will be plenty and zero cost euros for the ‘guys’. This decision was taken unanimously in ECB’s Governing Council last week with Germany not hesitating this time to support such a generous policy. The key to this Teutonic alignment with the rest of Eurozone member states is that the German banks are the first to need this ECB money bonanza. Many lenders in this country are dangerously undercapitalised and need badly this zero cost liquidity from the ECB.

All in all, either way western banks are now reassured that nothing will be done without their consent. The American Fed will continue to replenish their coffers with $85bn a month, and if the time comes for a change in the American generosity to banks, the ECB is ready to take over. Who is to tell to the European Union unemployed youngsters that the €6 billion, which the 27 countries are to spend on them during the next years, are peanuts compared to the supper profits the European banks are to make out of the zero cost ECB’s trillions? The European central bank says its statues do not allow it to spent money to support growth and fight unemployment.