Credit conditions in the eurozone continue to deteriorate while yields on French, Spanish, Belgian and Italian bonds move higher. Italy’s 10-year yield increased 19 basis points to 6.89 percent on Tuesday, just a stone’s throw from the “unsustainable” 7 percent. French debt is also under increasing pressure. The spread between France’s 10-year debt and German bund hit a new high on Tuesday, widening by 174 basis points. If yields continue to rise, European Central Bank (ECB) chief Mario Draghi will be forced to either expand his bond buying program (Securities Markets Programme) or watch while defaulting sovereigns domino through the south taking most of the EU banking system along with them.
Germany will not permit the ECB to act as lender of last resort. As the Bundesbank’s president Jens Weidmann explained in an interview last week, unsterilized bond purchases (monetization) would violate Article 123 of the EU treaty.
So, how bad will the EU credit crunch get? That’s a question the Financial Times blog tries to answer on Monday in a post titled “It’s a capital ratio of two halves”. Here’s a clip from the article:
“In another sign of how bad this is looking, Commerzbank, Germany’s leading lender to central and eastern Europe, is ceasing all loan origination outside of its home country and Poland…….But assuming any adjustments to the rules will come too little to late, we could be in for €1,500bn to €2,500bn of deleveraging according to a note published by Morgan Stanley on Sunday.” (“It’s a capital ratio of two halves”, FT. Alphaville)
Well, now, if the banks are going to unload a hefty $3 trillion in assets, (in an effort to meet the new 9% capital requirements) then they’re not going to be doing a lot of lending now are they? And, if there’s no credit expansion (new loans) then there’s no growth, right? In that case, people would be well advised to pick a cozy spot outside the unemployment office now before the lines form.
