A massive problem facing European banks is that they have become too dependent on liquidity provided by the ECB, this problem must be resolved by national authorities and not by the ECB, Governing Council member Mario Draghi said on Friday.
Speaking at a conference in Rome, Draghi warned that many euro zone banks are much weaker than appears from their balance sheets because the very low level of interest rates understates the worsening of their financial situation. As soon as rates rise they might well find themselves with no option but to default.
“The problem of addicted banks should not be addressed by the ECB but by financial authorities,” Draghi said.
He added that if the problem is not resolved soon then “we will have these zombie banks in the euro area for some time”.
In other remarks, Draghi said that in judging when to withdraw its emergency measures to help markets, the ECB must avoid the risk of leaving too much liquidity for too long, which could sow the seeds of a future crisis.
This problem is by no means only a European problem but it seems that a European is going to be the first to shout ‘the emperor’s got no clothes.’ Most of the global banking system and in turn global economy is running on stimulus money at the moment. It could be argued that the American economy has been running on it for a couple of decades now.
As long as countries can cover their debt obligations by strong fundamental factors then everything will be fine but like a giant Ponzi scheme, if at any point the economies stop generating income then it could all come crashing down.
This is what’s been dogging the Euro for a while now; traders are worried that overall output isn’t enough to cover the interest on outstanding loans and as Draghi’s statement implies there might not be enough fuel left to keep their fires alight this winter.
News like this hasn’t stopped the Euro going from strength to strength; again the value of the single currency has hit monthly highs across the board although this morning we are seeing a slight negative move which might signal a retracement.
Looking forward to this week we have an interest rate decision from Australia where the markets expect a rise of 0.25% to 5.75%, if this does transpire then we will undoubtedly see traders pile back into the Ozzy. Clients with money transfer requirements leading into this announcement should have a protective stop order in place.
The Bank of England meet this Thursday to announce their benchmark interest rate and more importantly their quantitative easing target. Any expansion of the target would be seen as an excuse to sell the pound and relative strength will certainly suffer.
