Friday, May 27, 2011

The European Central Bank in Trouble?

European Central Bank President Jean-Claude Trichet
The ECB is now burdened with assets that, quite frankly are more akin to liabilities.  In an article in Spiegel International (in English) Matthias Brendel and Christoph Pauly report that private commercial banks in struggling European economies are transferring their risk to the ECB.
Many bad loans have now ended up on [the ECB] balance sheet, including ones that were used to build houses like those in Carriglas and elsewhere. No one knows how much they are worth today -- and apparently no one really wants to know.

Since the beginning of the financial crisis, banks in countries like Ireland, Portugal, Spain and Greece have unloaded risks amounting to several hundred billion euros with central banks. The central banks have distributed large sums to their countries' financial institutions to prevent them from collapsing. They have accepted securities as collateral, many of which are -- to put it mildly -- not particularly valuable.
Ireland is apparently the big problem here.  So much of the debt accrued by the Irish government and various nefarious private investors has yet to be covered by the ECB.
Irresponsible real estate sharks, unscrupulous bankers and populist politicians had ruined the country's finances. It was forced to spend €70 billion to support its banks, even as the government itself was all but bankrupt. In November 2010, the Europeans came to the rescue of the Irish with €85 billion from their joint bailout fund. But Ireland is still far from being rescued.
Meanwhile, the Irish had been busy cranking out toxic asset-backed securities which have little or no value.  But the ECB is forced to prop up these economies to prevent a run on the currency.
No one really knows how high the central bank's risk is in the crisis-ridden countries of Ireland, Portugal, Greece and Spain. But Bundesbank statistics provide an indication of how drastically the situation has changed in Europe. They show that these countries' liabilities to the euro system have risen to €340 billion within about three years. Since the countries are disconnected from the international capital market and domestic savers have only limited confidence in their banks, other European central banks -- most notably the Bundesbank -- are forced to inject more and more money.

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