The Euro-Ponzi Rolls On

Includes: EU, FXE
by: Charles A. Smith

On December 22nd, 2011, the day after the initial European Long Term Refinancing Operation (LTRO), in which the European Central Bank (ECB) injected 489 billion newly-created Euros into sick banks, I predicted the following:

"This money will never get lent out. Haven't the monetary authorities in Europe been watching what has gone on in the U.S. for the past 3 years? These "refinancings" are nothing more than the (panicked) banks dumping their very worst collateral on the ECB to cover immediate withdrawals and maturities. And these withdrawals will keep on coming!...At least the U.S. Federal Reserve didn't cloak it all in a crazy web of circular transactions to obfuscate the fact that it was monetizing bad debts, as the ECB is doing. The Fed just gave the banks the cash, and they've kept it!

And this is exactly what happened. Between mid November 2011 and January 1, 2012, reserves held at the ECB nearly tripled, to over 500 billion Euros. Bankers are simply not going to lend new money when so much of it is already flying out the door to depositors!

Late February brought another round of bailing, this time to the tune of 529 billion Euros, and again the ECB reserve coffers spiked as the majority of the money came right back. The ECB deposit facility now totals nearly 800 billion Euros.

So let's sum it up: over 1 trillion new Euros have been printed, but approximately 70% of that amount has been parked in safekeeping at the ECB. Remember, the banks pay 1 percent annually for this largess, while earning only 25 basis points on what goes back to the ECB. Thus the net annual COST to the financial system for this absurdity is around 6 billion Euros.

Meanwhile, the withdrawals keep coming. Greek, Portugese, Italian and Spanish banks have continued to see deposit outflows into 2012. At some point, the markets will recognize the basic purpose of this charade: keep the system from collapsing for just one more day, month or year. The bankers in Europe have bought themselves a few months of peace. Six billion Euros a year may seem a small price to keep the wolf from the door, but the LTRO now totals over $4 trillion Euros, maturing over the next 3 years. He'll be back.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.