European Central Bank (ECB) Lends Dollars Again - 9-15-2011

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In addition, please refer to the "Original Proposal" two sections above, because it contains a wealth of information.

Click here for, inter alia, (A) information about what Bloomberg News discovered as a result of its Freedom-Of-Information-Act lawsuit regarding QE-1 which the Federal Reserve fought all the way to the US Supreme Court including how in 2008-2009 the Fed printed $7.7 TRillion and loaned it to banks on three continents, providing them with $13 billion in profits, (B) Fed Reserve Chair Bernanke's own explanation of QE-2, and (C) Fed Reserve Chair Bernanke's STEALTH QE-3 only 2 weeks after his Jackson Hole WY speech promising there would be no QE-3 (per Q&A-24/First Quiz calculations located in "Participant Comments" above), QE-3 comprised printing as much as $2.9 TRillion more dollars to keep Italy and Spain afloat through 12/31/2011.
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johnkarls
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European Central Bank (ECB) Lends Dollars Again - 9-15-2011

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Wall Street Journal – 9/15/2011

European Bank Lends Dollars Amid Debt Fears
BY BRIAN BLACKSTONE

FRANKFURT—The European Central Bank provided U.S. dollar loans to euro-zone banks for only the second time in six months and Spanish banks grew more dependent on the ECB for daily funding needs, intensifying fears that Europe's debt woes may generate a credit crisis and throw the euro bloc back into recession.

The reports came as Moody's Investors Service downgraded the ratings of two French banks, an indication that the debt crisis that started nearly two years ago in Greece now threatens some of the region's largest economies.

"There are growing concerns that we are going back into a credit crunch," said Jonathan Loynes, economist at consultancy Capital Economics in London.

Mr. Loynes slashed his euro-zone economic forecasts Wednesday, and now sees the euro bloc sliding into recession in 2012 and 2013. Most economists still predict continued growth, but at a weak pace.

But Mr. Loynes fears the mix of growth-draining fiscal belt-tightening, a loss of confidence among consumers and businesses and, now, the risk that financing costs may go higher in parts of Europe will lead to a 0.5% contraction in output next year and a further 1% slide in 2013.

Also on Wednesday, the ECB faced pressure on the legal front. The U.K. Treasury said it has begun court proceedings against the ECB over the bank's policy to stop U.K.-based clearinghouses dealing with some euro-denominated financial products. The ECB's recently published "location policy" would force all major clearers of purely euro-denominated transactions to be located in the euro zone.

The legal action marks the first time a member state of the European Union has taken court proceedings against the ECB. An ECB spokeswoman declined to comment.

The ECB said Wednesday that it allotted $575 million at its seven-day dollar auction. The ECB makes the funds available through an arrangement with the U.S. Federal Reserve. The facility had been due to expire in August, but was extended until August 2012.

Two banks requested the loans at a fixed rate of 1.1%. The ECB doesn't disclose who uses the lending facility. Analysts say euro-zone banks are finding it increasingly difficult to borrow dollars as U.S. institutions pull back capital in response to the region's debt crisis. Investors worry that euro-zone banks may need to take write-downs on their large holdings of Greek and other euro-zone sovereign debt.

The ECB last allotted dollar funds Aug. 17, when it lent $500 million to one bank. Before that, the ECB allotted no dollars for 23 consecutive weeks. At the height of the Greek debt crisis in May 2010, banks borrowed more than $9 billion in a single week.

"The overall size is not large, but the markets view its use as a negative stigma," said Nick Matthews, economist at Royal Bank of Scotland, referring to the latest U.S. dollar loans.

Separate data Wednesday signaled that funding strains aren't isolated to a handful of institutions, and that rising government bond yields in Spain and Italy are forcing banks in those countries to rely even more heavily on the ECB for loans.

According to data released Wednesday by Spain's central bank, total borrowing by Spanish banks rose to €81.2 billion ($111.1 billion) in August compared with €57.2 billion in July. Italian banks also have upped their use of ECB loans to similar levels in recent months.

Banks pay a higher rate to the ECB than they would in the interbank market, so heavy use of ECB loans usually suggests difficulty in obtaining short-term credit from other banks.

Banks in the region's trouble spots face another challenge: deposit flight. According to ECB data, business and households deposits at Greek banks have fallen more than €18 billion since the start of the year, draining those banks of a source of funds, and making them more dependent on the ECB. Deposits in Spain, Italy and Ireland also fell in July.

Concerns over the state of Europe's banks intensified last month when International Monetary Fund Managing Director Christine Lagarde said they needed urgent recapitalization.

ECB officials have since then scrambled to convince financial markets that there is no shortage of funding. Their argument: Banks have trillions of euros worth of eligible collateral through government bonds, corporate bonds and asset-backed securities, and the ECB is lending as many euros to banks as they need.

"There is no liquidity issue for the banking sector of the euro area as a whole," ECB President Jean-Claude Trichet said last week.

But some analysts say that in emphasizing the abundance of funding and collateral for the euro bloc as a whole, the ECB is missing the relevant point for financial markets: It isn't the average that matters, but rather the outliers.

"At the start of euro-zone crisis a lot of people paid attention to averages, now it's almost a worthless tool," said Raoul Ruparel, analyst at think tank Open Europe. "It's the details that count."

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