ECB again to subsidize euro area banks with more than one trillion euro

European Parliament. Plenary Session. Mario Draghi, President of ECB presents the European Central Bank annual report. (EP Audiovisual Services photographic library).

The Governing Council of European Central Bank decided last week to hand out to Eurozone banks additional liquidity of up to €1 trillion at almost zero cost, under its new targeted longer-term refinancing operations (TLTROs). At the same time it also decided to “intensify preparatory work related to outright purchases in the Asset Backed Securities (ABSs) market”. In short, the central bank of Eurozone is ready to flood the banking sector with gift-money, hoping, or aiming, allegedly, that at least a good part of this money would be used to finance the real economy, especially the SMEs in the peripheral countries. In this way, the central bankers theoretically aspire to reduce the fragmentation of Eurozone’s financial market and thereby support growth. Let’s see if this is the case.

Up to one trillion euro

The President of the ECB Mario Draghi answered this question positively, yet not quite. He said, “Using our internal analysis, our internal models, we have asked the question whether this new measure (TLTROs), depending on its take-up, will have an impact on the inflation rate and the growth rate of the euro area. And the answer the models gave is that they do have an impact”. Of course the target is to support the real economy. According to Draghi “we are interested because we want to channel lending to the real economy, and more specifically, to the SMEs”. But how can the ECB be sure that its money will end up in the SMEs?

It’s the banks, stupid!

This verification may prove impossible. The reason is that deciphering the inscriptions in all the major banks’ balance sheets and be sure that this money was used for a certain purpose, is tantamount to crystal ball reading. In any case the ‘model’s’ answer is extremely vague saying just that “it will have an impact”.

Draghi, being conscious of that, wanted to make the ‘prophecy’ a bit more concrete. He added, “It’s going to be a significant impact, and it will certainly be very helpful”. The careful reader may notice the descending tone of the impact’s assessment from ‘significant’ to ‘helpful’. This can justify a degree of uncertainty about the motives and the targets set by the ECB over this additional billion of euro or more the banks are going to receive.

Not to forget that on top of the trillion to flow from ECB’s TLTROs to lenders, the central bank also plans to transfer additional billions to banks through purchases of ABSs in the near future. It’s important to note that all those Governing Council decisions are unanimous. It means that the two German members of ECB’s top decision making body have voted positively. However, taking into account Germany’s adamant stance in denying the use of monetary measures to support growth in the real economy, this money bonanza planned to flow freely, must have other targets too, besides helping the ‘poor’ SMEs of Italy and Greece. Allegedly, these other targets could be a subsidy to banks themselves and not their clients. It’s an open secret that German and the other top Eurozone banks do need back up. Let’s elaborate on that.

What the lenders need

There is one more thing that makes a suspicious observer even more careful. This is the forthcoming bank stress tests to be performed by the ECB. The basic questions those tests have to answer are firstly related to the quality of the bank assets and secondly, if the lenders have enough capital to cover the risks lurking in their balance sheets. Everybody knows that both answers lie deep in the negative part of the chart. No, the quality of the bank assets is not good to say the least, and secondly the banks don’t have enough capital to cover their risky placements in every conceivable market. Include in this the financial derivatives of any kind and the collateralized debt obligations (CDOs) even of the squared type and you come up with a balance sheet full of mines. The International Monetary Fund has spared no words in emphasizing the need of a profound improvement of the quality of Eurozone banks’ balance sheets.

The ‘mighty’ banks with clay feet

Take for example the ‘mighty’ Deutsche Bank. The largest German lender has been boasting till recently that it doesn’t need more capital. Then suddenly last month we learned that Deutsche is to offer a new share issue of a total value of around €8 billion. A part of it has been pre-inscribed by the Qatar ruling family for a total amount of €1.75 billion. What remains unclear is the discount the bank was forced to concede for such a massive placement, which greatly facilitates the absorption of the rest of the issue. Let alone the political brinkmanship that the Qatari placement may hide. Undoubtedly, this fixing is not a market driven operation and may hide German political support elsewhere, in return for a financial ‘favour’ from the Qatari autocrats. Consequently, Deutsche Bank cannot claim that this was a regular investment decision proving its financial fitness.

This fact is indicative of the problems of asset quality and capital adequacy that all Eurozone lenders are now facing. Understandably such difficulties are much more acute in peripheral counties like Greece. All euro area banks urgently need more money in whatever form it may come; capital participation is the most wanted kind, but this is a rather rare bird. Market driven Tier-1 capital placements from investors demand so large discounts that no major Eurozone bank can accept. Take the example of the Greek fourth largest bank, Eurobank, which changed hands at a ridiculously low price. The euro area champions though cannot accept a similar humiliation, which may even drive the whole European financial system to uncharted waters. Definitely then some extra liquidity from the ECB will do all Eurozone banks a lot of good. It may finance for example some short-term risky placements to provide more profits and thus increase lenders’ own capital.

Then who is subsidized?

Of course ECB says it will be watching over how the banks are going to use this new extra euro trillion or more. But then again ECB may even look the other way, if the culpable party is Deutsche Bank, Commerzbank, Credit Agicole, BNP Paribas or ING. All those banks and many others have been unduly favoured in the past by the ECB, at the peak of the financial crisis. It was the time when the central bank bought from them their bad loans to Greece, Ireland, Portugal and Spain, at prices much higher than the markets offered. On that occasion the ECB supported the German and French banks with €150bn. On top of that, one may recall that the Berlin government directly subsidized with €50 billion a number of German banks without asking Brussels for a competition clearance.

In the four Eurozone member states under a ‘Troika’ of EU-ECB-IMF ‘memorandum’ (Greece, Ireland, Portugal, Cyprus), things were even worse. Taxpayers there were forced to underwrite and repay the faulty assets of banks at face value, at a time when they were worth less than one fifth of it.

ECB again to bail out the banks

Then the ECB may once more be planning a new covered operation, again to support the Eurozone banks, with freshly printed money at almost zero interest rate cost to the lenders. This sounds very logical, if one considers the real meaning of the fact that today Europe has made depositors responsible of the recklessness, the greed and gangster behavior of bankers. If their banks fail due to their insatiable appetite for money, depositors are now asked to foot the bill as it happened in Cyprus. If depositor money is not enough, taxpayers will cover the rest.

The Bank Resolution Fund instituted by the European Banking Union and in eight years expected to be capitalized by the banks themselves, is not enough to cover the default even of a small peripheral bank, let alone the holes of the ‘champions’. That’s why the ECB rushes to print and hand to bankers one more trillion at zero cost to them, at the expenses of all euro area consumers and wage earners.

It’s like lamenting good old capitalism where, banks, business and individuals were ‘free’ to go bust and allow new business initiatives to appear all the time.