-- Posted Wednesday, 21 December 2011 | | Disqus

The European Central Bank loaned 523 banks an unprecedented $645 billion over three years at just one per cent in a new initiative to keep the banking system afloat. That so many banks were prepared to borrow so much just underlined the gravity of the crisis in the eurozone which it still far from resolution.

European stocks initially rallied on the news and the fell back into negative territory. The ECB’s action is in the expectation that the banks will use this money to buy sovereign debt as the record amount of refinancing comes due in the New Year. But they could choose to keep the money and ignore government debt auctions.

Solvency solution

So the solvency of European banks is assured for a while but the sovereign debt crisis is as far from resolution as ever. Pimco, the world’s biggest bond fund, still puts the chance of a chaotic break-up of the eurozone at one-in-three.

Flooding the eurozone banking system with cheap money allows the ECB to get around rules that prevent it directly buying sovereign debt. But it maybe asking too much to expect banks to double up on bond holdings that so recently threatened to make them insolvent.

Gold and silver both rose in price after the announcement which is a clear commitment to money printing by yet another global central bank. ‘Stealth QE’ was one banker’s verdict.

Even more debt!

However, we are still left in the same basic quandry: how does creating more debt solve a problem caused by too much debt? Ultimately inflating the money supply will reduce the real value of nominal debt but it is a horrible instrument with nasty side-effects.

Besides the crucial link between giving out almost-free cash to the banks and bond refinancing is still missing. There is no compulsion here or necessary connection. For that the ECB would have to buy these bonds and replace them with its own eurobonds. That the ECB, unlike the Fed has no mandate to do.

So did pumping $645 billion into the eurozone banks make the crisis better or worse today? That is a question that will soon be answered in the New Year and the ECB may not like the response.

-- Posted Wednesday, 21 December 2011 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

© 1995 - 2019

Live GoldSeek Visitor Map | Disclaimer