When the WSJ published an allegation on Tuesday that BNP Paribas had been cut off by US money-market funds, the bank responded with indignation, saying that it “categorically denies the statements made by this anonymous source”. But it never quite came out and said that it had access to US money-market funds — it just said that it still owed them money, and that it was “fully able to obtain USD funding in the normal course of business, either directly or through swaps”.
Today, Gareth Gore reports in a bit more detail what’s going on, and the WSJ report seems to be holding up:
US banks have become the unlikely saviours of their ailing European counterparts, signing private agreements to lend them billions of dollars in recent weeks after an exodus of nervous money market funds left many without ready access to short-term funding.
Agreements worth tens of billions of dollars have been signed in the last month alone…
Loans have been made as repo agreements, with banks posting assets such as corporate loans and mortgage portfolios as collateral.
“We were able to use some of our assets to get long-term repos,” said one board member at a French bank. “It was a move we made to monetise some of the assets we had on the balance sheet which were good, quality assets, and also to mitigate the withdrawal of money market funds.”
Meanwhile, in a huge move reminiscent of the worst days of the financial crisis, the biggest central banks in the world — the ECB, the Fed, the the Bank of England, the Bank of Japan and the Swiss National Bank — have announced a massive coordinate injection of unlimited three-month liquidity, designed “to offer banks as many dollars as they needed”.
Yes, I think that it’s fair to assume the reports of a liquidity crunch were pretty much on the money.
The world’s central banks, then, have managed to kick the can another three months down the road — but I’m with George Soros on this one: we’re pretty much at the end of that road, now, and something much more substantive has to be done.
Soros wants a much more federal Europe, with a new treaty setting up “a European treasury with the power to tax and therefore to borrow”. If that doesn’t happen, he says, we face “a possible financial meltdown and another Great Depression.”
Tim Geithner reportedly has a slightly more modest idea, which is just that the ECB can and should leverage the EFSF, turning the couple of hundred billion euros remaining there into something much larger. His model is the US TALF, which had roughly 10-to-one leverage, which would imply that a similar program in Europe could generate more than $2 trillion of firepower.
I’m not at all convinced that the independent ECB would go along with such a scheme. Here’s Soros again:
The ECB’s earlier decision to buy Greek bonds had been highly controversial; Axel Weber, the ECB’s German board member, resigned from the board in protest. The intervention did blur the line between monetary and fiscal policy, but a central bank is supposed to do whatever is necessary to preserve the financial system. That is particularly true in the absence of a fiscal authority. Subsequently, the controversy led the ECB to adamantly oppose a restructuring of Greek debt—by which, among other measures, the time for repayment would be extended—turning the ECB from a savior of the system into an obstructionist force. The ECB has prevailed: the EFSF took over the risk of possible insolvency of the Greek bonds from the ECB.
The point here is that the EFSF was specifically designed as a fiscal alternative to the ECB; if the ECB wasn’t happy putting up $440 billion of its own money for such schemes, it’s unlikely to put up $2 trillion.
Still, today’s news is encouraging — it shows some progress, on the central-bank front, in terms of willingness to grapple with the problem. Europe’s choices are simple: it can bail out its banks on a federal basis so that they in turn can write down their sovereign-debt holdings; it can bail out its sovereigns on a federal basis and then get the sovereigns to bail out the banks; or it can do a bit of both. In providing unlimited liquidity to Europe’s banks, an important precedent has been set. Now we just need to get them a few hundred billion dollars in capital. But I have to admit I have no idea where that might come from.