FTSE 100
Dow Jones

Wednesday, 21 December 2011

Banks take cheap money shocker

The European Central Bank has reported strong demand for an offer of unlimited three year loans. Banks were urged to take the funds to ease pressure on the eurozone financial system.

More than 500 European financial companies took €489bn worth of loans from the ECB’s longer-term refinancing operations, or LTROs.

Of course what are those banks going to do with loans priced at 1%.  Most likely they will use it all to buy European government bonds yielding several hundred basis points more, in a straightforward carry trade.

That in turn allows the various European governments to raise the cash they need to back their recent IMF commitments.

So nothing really happened except cash flow from the ECB to the IMF via the banks and national governments.  The banks make a spread, and you dear tax payer, will be picking up the tab.


Bill Bell said...

The problem is that the way we have configured the global financial system means that in order to do something like print money to lend to governments to monetise their debt we have to do it via financial institutions, further exacerbating to big to fail and tightening the nexus between banks and their governments.

What a strange way of organising things, maybe another bank tax would even things up...

Alex said...

So we have banks owned by governments paying tax to the [owners] whenever they do any business. That is just taking money out of one pocket and putting it into another. If governments want to reduce pay at banks that they own then they just have to tell the management what to do (or you're fired). Just like any other business owner. Lower pay means more profits and more tax on profits. Mind you that will not be enough to fix government spending.