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Saturday, August 27, 2011 12:49 PM


Capital Flight Proves Confidence in European Interbank System has Collapsed


Capital flight from European banks has now reached such a state that for one undisclosed bank needed emergency funding last week for a mere $5 million. Previously, the ECB stepped in to provide $500 million in emergency liquidity measures to non-disclosed banks.

As money flees Europe, it lands in US banks that do not know what to do with it. Capital flight has led to negative interest rates in the US.

DurationU.S. Japan Germany UK
3-Month-.010.100.970.51
6-Month0.020.110.560.59
12-Month0.080.120.590.53
2-Year0.190.140630.59
3-Year0.320.170.670.75
5-Year0.930.341.201.36
7-Year1.520.591.631.84
10-Year2.181.042.142.49
30-Year3.552.012.983.75


Swelling US Deposits as Money Flees Europe

For a look at European Bank funding needs please see 8 Trillion Euros in Borrow-Short Lend-Long Madness at European Banks; Circuit-Breaker Silliness; Dash for Cash Sends Short-Term Rates Negative Again

"Lehman-Like" Credit Crunch Hits EU

For discussion of the European credit crunch and $500 million in emergency liquidity measures to undisclosed banks, please see "Lehman-Like" Credit Crunch Hits EU; ECB Will Not Disclose Affected Banks; Euro-Style Anxiety Spreads to U.S.

$5 Million in Emergency Funding

$5 million is a trivial amount. That a bank would need it is not.

Jean-Pierre Chevallier writing on Business économiste monétariste behavioriste discusses the stetup in his latest post ECB: no more bets! More…
The situation is out of control in the euro zone, as I have been writing it for a while…

The interbank market does not work because euro-zone banks managers have lost confidence in other banks. So they keep their cash in US$ rather than lending it to other banks that need it as they would in normal times: ECB had loaned $5 million to a bank on August, 25.

ECB had previously loaned $500 million (USD) on August 17. This caused a flash-crash in U.S. markets.

The problem is serious.
Chevallier notes that the paltry amount of money involved "shows that the interbank system is completely blocked".

Trust in European banks is shot, and by hiding the banks needing emergency liquidity funding, distrust spreads to all banks in the system. Then again, why shouldn't distrust spread?

The entire global financial system is bankrupt. Loans have been made that cannot and will not be paid back.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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