Today's lower than expected interest in the 3-month LTRO operation was supposed to indicate a sign of stability for European banks. Nothing could be further from the truth. In an article which recaps a variety of data points presented here previously, the FT summarizes that European banks continue to exist solely due to a record and unprecedented $1 trillion in emergency loans issued to Europe's commercial banks. In turn, almost 40% of this liquidity is then recycled, and stored back with the ECB, as the very same banks have no trust whatsoever in any of their peers. In short: no matter what the Stress Tests indicate, the European financial system is now in a worse condition than ever in history, including the days just after Lehman.
From the FT:
The ECB is currently lending close to €900bn ($1,098bn, £728bn) to eurozone commercial banks, jumping to near-record levels since the creation of the central bank 11 years ago. This now matches cross-border lending between commercial banks in the 16-nation currency zone, according to JPMorgan.
Although lending between domestic banks represents the lion’s share of the estimated €6,300bn market, the ECB has become essential as a lifeline to the weaker of the 3,000 banks in the eurozone.
At least some people still have the guts to laugh in the face of JCT's propaganda:
Paul Griffiths, global head of fixed income at Aberdeen Asset Managers, says: “Without financial support many banks would struggle. It would take a brave man to turn the ECB taps off.”
Summarizing just how critical the ECB's role is in the proper functioning of European banks:
Since Lehman Brothers collapsed in September 2008, lending by the ECB to eurozone banks has risen sharply as it has offered unlimited loans and extended its liquidity operations. This has seen the sum it lends to the banks rise from about €500bn before the Lehman crisis to today’s near record levels.
As well as the offer of unlimited loans, the ECB has bought €55bn in eurozone government bonds and €60.2bn in eurozone covered bonds in an effort to revive the eurozone economy and boost sentiment.
However, fear still stalks the markets. Interbank dealers say credit blocks remain on Spanish and Greek banks because they are seen as too risky to lend to.
The fear of lending to other banks because they may fail to repay loans is also reflected in the large sums of cash being deposited at the ECB overnight.
In spite of offering only 0.25 per cent for deposits, commercial banks parked €305bn at the ECB on Monday night because they prefer the safety of placing their money with the central bank rather than lending to other banks at higher rates. Before the Lehman crisis, overnight deposits at the ECB were typically less than €10bn.
And a pretty chart showing just how contrary to fact are all European claims that all shall be well.
At this point it is worth reminding that the Fed is a paragon of transparency and openness when compared to the infinitely more nebulous ECB. One thing that can be assumed with certainty for both central banks, however, is that this $1 trillion+ in cash lent out is backstopped by some of the most toxic paper in existence. The collateral received in exchange for the cash, which in turn forms the asset side of the ECB's balance sheet, is also the guarantor of the money in circulation in the eurozone, and is the implicit baker of the value of the Euro. Next time you wonder why more and more people are calling for EURCHF parity, keep in mind that almost a hundred billion in Greek bonds is just part of the worthless recourse backing that piece of paper in your transatlantic wallet.