Bank Stress, ECB Liquidity Withdrawal Efforts, Deflation Fears Rattle Markets

Just really feeling down about the general rapidity with which we are re-deteriorating. I hope the protesters in Europe can make a difference. Global austerity is the recipe for Great Depression II, bad policy abounds and the banks still have a death grip on us.

Bank Stress, ECB Liquidity Withdrawal Efforts, Deflation Fears Rattle Markets
http://www.nakedcapitalism.com/2010/06/bank-stress-ecb-liquidity-withdrawal-efforts-deflation-fears-rattle-markets.html">Naked Capitalism

We’ve warned for some time that the eurozone’s sure-to-fail muddle-through approach to its structural challenges was rattling investor confidence. Worse, its insistence on wearing an austerity hairshirt was not only committing Europe to deflation, but had high odds of sucking the global economy down along with it. Given how fragile the recovery is in advanced economies, and the magnitude of the debt overhang in many nations, a downturn could easily morph into a deflationary downspiral, potentially a full blown depression.

Let’s recap of some of the troubling sightings. First is that Spanish banks in particular, along with other Eurobanks, have been on the ECB drip feed for some time. Recall that the Spanish banking authorities pushed for the release of stress information on their banks precisely because they hoped that it would reassure the market and improve access to private funding. However, in a rather remarkable bureaucratic dedication to deadlines over common sense, the ECB is terminating a €442 billion one year liquidity facility on July 1 (FT Alphaville has been covering this intensively). An unknown but believed-to-be-large portion of the facility was used to fund carry trades within the EU, particularly that of Spanish and Greece sovereign debt (until spread widening late last year started burning fingers). To the extent it has been used to finance bank operations, the theory has been that banks would avail themselves of shorter-term ECB facilities, particularly its three month program.

Wellie, so that should not prove bothersome, right? Theory does not seem to have translated very well into practice. Europe opened badly on Tuesday, and the flight to safety continued in the US, with yields on ten-year Treasuries falling below 3%. There is also evidence of liquidity-hoarding, with an ECB sterilization operation going badly.The lousy US consumer confidence figures are the public face of considerable nervousness about the business outlook. For instance, despite the brave talk of recovery, corporate bond issues have fallen as companies increase cash levels rather than expand operations.

The ECB has retreated a tad in the face of the vote of no confidence from the markets, and will offer unlimited three month loans today, in advance of the termination of its one-year facility.

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