Economy
In reply to the discussion: Weekend Economists' Harvest Ball September 21-23, 2012 [View all]Demeter
(85,373 posts)VIDEO GRAPHIC AT LINK
http://www.bloomberg.com/news/2012-09-18/deposit-flight-from-europe-banks-eroding-common-currency.html
A total of 326 billion euros ($425 billion) was pulled from banks in Spain, Portugal, Ireland and Greece in the 12 months ended July 31, according to data compiled by Bloomberg. The plight of Irish and Greek lenders, which were bleeding cash in 2010, spread to Spain and Portugal last year. The flight of deposits from the four countries coincides with an increase of about 300 billion euros at lenders in seven nations considered the core of the euro zone, including Germany and France, almost matching the outflow. Thats leading to a fragmentation of credit and a two-tiered banking system blocking economic recovery and blunting European Central Bank policy in the third year of a sovereign-debt crisis.
Capital flight is leading to the disintegration of the euro zone and divergence between the periphery and the core, said Alberto Gallo, the London-based head of European credit research at Royal Bank of Scotland Group Plc. Companies pay 1 to 2 percentage points more to borrow in the periphery. You cant get growth to resume with such divergence.
Lending Rates
The erosion of deposits is forcing banks in those countries to pay more to retain them -- as much as 5 percent in Greece. The higher funding costs are reflected in lending rates to companies and consumers. The average rate for new loans to non- financial corporations in July was above 7 percent in Greece, 6.5 percent in Spain and 6.2 percent in Italy, according to ECB data. It was 4 percent in Germany, France and the Netherlands.
Some of the decline in deposits is because German and French banks are reducing their exposure. They cut lending to their counterparts in the four peripheral countries plus Italy by $100 billion in the 12 months ended March 31, according to the latest data available from the Bank for International Settlements. ECB data count interbank lending as deposits, as well as money being held for corporations and households. Banks in the core countries also have been reducing their holdings of Spanish, Portuguese, Italian, Irish and Greek government bonds. At the same time, lenders in the periphery have been buying more of their own governments debt. That has further contributed to the fragmentation of credit along national lines, as banks collect deposits from people and companies in their own countries and lend internally.
IMF Warning
Organizations such as the International Monetary Fund have warned about the danger of such fragmentation. Financial disintegration along national lines caps the benefits from economic and financial integration that underlie the common currency, the IMF wrote in an April report. The disintegration can fuel a cycle of deteriorating economic conditions and weakening banks, said David Powell, a Bloomberg LP economist based in London. The more banks pay for deposits the less profitable some of their businesses are, he said. A Spanish lender that borrows at 4 percent from depositors and is limited by Europe-wide interest rates to charging only 2.5 percent for a mortgage is losing money.
The financial divergence is a symptom of the underlying economic divergence, but they feed on each other, making it harder to break out of, Powell said. Until companies and individuals are convinced that the euro will survive, they wont invest in the periphery, and that will keep funds away.
ECB Loans
The ECB has taken the place of depositors and other creditors who have pulled money out over the past two years, largely through its longer-term refinancing operation, known as LTRO. The Frankfurt-based central bank was providing 820 billion euros to lenders in the five countries at the end of July, data compiled by Bloomberg show. Irish and Greek central banks loaned an additional 148 billion euros to firms that couldnt come up with enough collateral to meet ECB requirements. Because central-bank financing is counted as a deposit from another financial institution, the official data mask some of the deterioration. Subtracting those amounts reveals a bigger flight from Spain, Ireland, Portugal and Greece. For Italian banks, what appears as a 10 percent increase is actually a decrease of less than 1 percent. When financing by central banks isnt counted, the data show that Greek deposits declined by 42 billion euros, or 19 percent, in the 12 months through July. Spanish savings dropped 224 billion euros, or 10 percent; Irelands 37 billion, or 9 percent; Portugals 22 billion, or 8 percent.
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IT'S WORSE THAN I THOUGHT...OR THAN THEY'VE BEEN WILLING TO ADMIT. WE'RE DOOMED...HOTLER HAS ANOTHER CONVERT.