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The ECB can’t do this forever. Or can it?

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Euromoney Skew
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Newswire reports reveal French banks European Central Bank borrowing rises to €158.5 billion


So the news that French banks are still on a borrowing spree won’t raise many eyebrows, as their dependency on the European Central Bank (ECB) was heavily used against most of the French banks that were recently downgraded.

According to DJ newswires:



French banks turned to the European Central Bank for an additional EUR11.5 billion in October from September, the Bank of France said Tuesday.

The rise to EUR158.5 billion in October follows a surge to EUR147 billion in September from EUR69.8 billion in August, according to the balance sheets published by the Bank of France.

Extra borrowing from the central banks in the eurozone indicates private lenders are struggling to borrow from other banks, or facing tougher borrowing conditions.

While high compared to the EUR38.9 billion low recorded in May this year, banks' borrowing from the Bank of France in October is still below levels seen at the height of stress on financial markets after the collapse of Lehman Brothers in 2008.

In December 2008 borrowing from the Bank of France stood at EUR215.3 billion.



The markets know all too well how ‘disappointed’ and vehement French politicians have been to safeguard their AAA status – despite statistics suggesting anything but.

Meanwhile, Euromoney has presented the case for France and its banks relinquishing its AAA status for sometime now.

It’s no wonder S&P placed all eurozone sovereigns on credit watch, for a downgrade, with five AAA-rated sovereigns on a list for a one-notch downgrade. A sixth, France, has been highlighted by S&P for a potential downgrade by two notches.

But the question as to whether or not the ECB can keep the banks afloat is another matter altogether.

Recently, Euromoney did an investigative piece on how politicians and market participants – who have seen investors turn their backs on the EFSF and abandon the European government bond markets – are pressing the ECB to save the day and increase its buying.

That recent ECB borrowing data shows this. With the rise to €158.5 billion in October following the surge from €69.8 billion in August, the ECB will surely buckle underneath the weight.

Euromoney asked if an already stressed ECB balance sheet could even cope with the demands that such a programme would entail.

In an exclusive interview with Euromoney, one of the world’s most distinguished macroeconomists Willem Buiter, chief economist at Citi, said that the ECB would fail European Banking Authority (EBA) stress tests, which are usually reserved for corporate financial firms “miserably”: 



“Yes, the ECB would fail the EBA stress test miserably, but this is a complete nonsense issue. It is irrelevant to subject a central bank to a form of stress testing that is used for corporations and financial institutions, as the ECB’s loss absorption capacity, its economic capital, bears no relationship to conventional forms of regulatory capital or equity,” says Buiter.

“The ECB’s non-inflationary loss absorption capacity is massive – it could easily reach €3 trillion or more. Even if the ECB were to incur €1 trillion-worth of losses from Greek sovereign default, it would carry on and live to see another day, meeting all its financial obligations and not having to print money on a scale that would threaten undesirable inflation.”

“Essentially, a central bank can print legal tender and, if necessary, can make up for any losses by borrowing against its future ability to create central bank money,” says Buiter. “This is not necessarily a highly attractive option, as excessive recourse to central bank money creation would create unwanted inflation. However, even if the central bank only prints enough money to keep inflation at 2% per year from now on, it would be able to survive massive losses on its balance sheet, as large as €3 trillion according to our calculations.”



For the full report on the ECB: The end of the last resort click here

- Euromoney Skew Blog