The eurozone banks have stopped lending to each other in a clear sign that mistrust has entered the system. We already know that Deutsche Bank is 60 times over leveraged with a massive derivative exposure. As Irish economist Karl Whelan put it best “At any point in time, this thing can blow up”.
EUROZONE banks are refusing to lend to peers in other countries in the common currency bloc, signalling a worrying fall in confidence that appears to have worsened since the Cyprus bailout earlier this year, data analysed by Reuters shows.
European Central Bank data shows the share of inter-bank funding that crosses borders within the eurozone dropped by one-third, to just 22.5pc in April from 34.5pc at the start of 2008.
The silent retreat to within national borders is most pronounced in the troubled economies of southern Europe, but is even seen in Germany.
Cross-border inter-bank funding of German banks was down by 11.2pc year-on-year in March, equivalent to banks elsewhere in Europe withdrawing €29.5bn from its biggest economy.
Eurozone banks’ stock of lending to their Greek peers was a startling 68pc lower in April than in the same month a year earlier, equivalent to €18bn withdrawn. In Portugal, the decrease was roughly a quarter.
The ECB figures include lending between separate banks in different eurozone countries and within a single banking group to its cross-border units.
Faltering confidence may be responsible for the reduction in cross-border lending, due in part to a bailout of Cyprus that closed one of its two main banks.
Lobbyists for the banking industry also say a soon-to-be-finalised EU law making it possible to impose losses, or “haircuts”, on bank creditors could hurt confidence.
“At any point in time, this thing can blow up,” said Karl Whelan, an economist at University College Dublin, warning of a potential spillover on to regular savers.
“We are relying on an absence of panic among depositors while we sit around and work out who to haircut. There is a risk of large-scale deposit withdrawals in Spanish banks, in particular. They are the obvious tinder box.”
A spokesman for the European Central Bank countered that the trend was due to a general shift towards secured lending and funding via retail deposits. Banks were deleveraging, which increases the importance of stable retail deposits. (Reuters)
Source: Irish Independent