Marshall Auerback — Another one bites the dust

It might seem strange to invoke Freddie Mercury and Queen in the context of the euro zone, but it’s the first thought that springs to mind, as Brussels and the increasingly hapless ECB continue to mismanage their way to catastrophe. On Tuesday, we suggested that the Spanish plan to recapitalise Bankia (which came with the ultimate backing of the ECB, the only entity that can credibly backstop Europe’s banking system) introduced a potential solution to the eurozone’s metastisizing banking crisis. Sadly, it’s another idea which will never get off the bulletin board, as the ECB bluntly rejected any proposal to use its balance sheet to indirectly fund Bankia, the troubled Spanish lender.

So we’re back to floundering and the markets are reacting accordingly. What most investors, experts, and policy makers fail to realize is that this bank run is not simply a Greek problem, which will cease if and when Greece is thrown out of the euro zone. If one looks at the Target 2 balances, the ELA, and the ECB’s lender of last resort facilities, it’s clear that this has extended into all of the periphery countries, including Spain and Italy. We are in the midst of a bank run in Europe in which half the aggregate deposits of Greece, Ireland and Portugal combined and a quarter of the deposits from Italy and Spain have already departed. The ECB’s lender of last resort loss exposure to these countries may now be closing on two trillion euros – more than 20 times its capital. Worse yet, the ECB and the European authorities acknowledge none of this and seem to be doing nothing about it. If anything, “tough talk” from some of them may be escalating the bank run.

Read it at Pinetree Capital | MacroBits
Another one bites the dust
by Marshall Auerback
(h/t Kevin Fathi via email)