Eurozone Banks: Confidence Gone!
As if the Greeks don’t have enough to deal with right now with their country cut off from the benefits of a national television and radio station. What is it they say in the UK? Something like ‘when it rains it pours’. You might as well get your brollies out boys and girls, as this one looks like it is going to come down in torrents. You might also, with just a hint of imagery and poetic license, say that Europe has decided to pile it on with a shovel in heapfulls right now. Talk about kick a man while he is down.
The European Union prided itself on their motto of ‘United in Diversity’. That was chosen back in 2000, when the Euro was nothing more than a twinkle in the eye of the founding fathers. It still had two years of gestation before it would see the light of day on that historic 1st January 2002.
United in diversity, cultural diversity and ethnic origins, ideas and ways of thinking. The modern-day melting-pot-come-salad-bowl, with the French as the tangy onions and the Brits as the squashed tomatoes of the EU, with just a dash of sharp vinegar from the Germans to keep everybody smarting as it got tossed in the air. Literally, the diversity-unity conundrum did get tossed somewhere. Somewhere out of reach, it seems.
Today, the motto should be changed. It’s more like ‘Disunity with Adversity’. Now, the Eurozone banks have started refusing to lend to each other, spreading the word that confidence has ebbed yet lower in the stakes, in the wake of the bailouts that have taken place.
Data from the European Central Bank shows that interbank lending is back to what it was at the start of the Euro, when everybody had cold feet and nobody knew if Bank A was telling the truth to Bank B and if Country C was telling fibs over the state of its economy. Then, things picked up and lending went wild. But, the white lies are the worst ones to swallow. They leave a bitter taste. Insidious little baskets (of olives)! Some might say that they were right to have cold feet.
Cross-border lending between banks in the Eurozone dropped to 22.5% in April. It stood at 34.5% before the financial crisis put the dampers on all that. European banks have closed in upon themselves and gone into hiding like jack-rabbits. They are more interested and more confident in their domestic markets. Although, is that surprising?Get your own house into order before you can start helping somebody else out, right? Analysts have shown that German interbank funding fell by 11.2% compared with March 2012. That means that there has been the equivalent of €29.5 billion withdrawn from the German economy alone. Greece has suffered a loss of €18 billion being withdrawn from the banking system. Germany might be able to stand that sort of withdrawal, but the question as to whether or not Greece can is definitely not hard to answer. Portugal has had a reduction of 25%, on average.
The European Central Bank issued a statement saying that it had nothing to do with confidence or mistrust.
But, if the banks aren’t lending to each other, it means that there isn’t the money entering the economy. No money means the real economy isn’t getting its hands on the credit. Banks are wary about extending credit to other members of the EU when they look back at the bail-out that was necessary in Cyprus when one of its major banks had to close, making creditors put up with the losses incurred.
European Union Finance Ministers are meeting today in Luxemburg to discuss resolutions regarding how banks are wound up in order to create some sort of uniformity across the EU (member states do not have the same laws regarding which creditors are to be paid out in the event of a bank going bankrupt). The objective is to put the onus on the private creditors rather than making the taxpayer foot the bill. At last! If they do come to an agreement we won’t be talking of a bail-out, but a bail-in in the future.
However, those decisions might look good to the taxpayer, but they are eating away at confidence in the banking sector. Large deposit holders look like they are worrying about the fact that private creditors may not be able to bail-in the banks that fail in the future, simply because they too will be failing, crushed under the losses. Nervousness means that they might decide to withdraw deposits and nobody needs anyone to draw a picture of what will happen then.
All of this comes at the same time (remember: it never rains, but pours?) as the International Monetary Fund’s decision was announced that it will suspend payments that are aiding Greece in July if the Eurozone does not patch up the shortfall (roughly €3 billion-€4 billion) in the rescue plan (worth €172 billion). International-Monetary Fund regulations stipulate that governments must prove that they have financing that is 12 months ahead in order to receive disbursement. Funding will be interrupted (if they stick to the book) since Greece only has financing covered until this time 2014. Given the current mistrust of the finances of other economies in the Eurozone, it looks doubtful if pulling that one off is going to be an easy task.
Mistrust is viral. Once it has set in and it cankers away at the banking system, it will take a hell of a change to bring it back and make it swing the other way.
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