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Banking System at the Brink

Written by Gary North on November 1, 2011

Yesterday’s intervention by six central banks indicates how close to the edge of a financial crisis the world now is. A hard-hitting article in Britain’s Guardian reveals how close to a breakdown banks are in.

The stunning move by six central banks to announce emergency measures to push more dollars into the financial system shows just how desperate the authorities are to “ease strains in financial markets” that are making it difficult for some banks to operate as easily as normal.

Jon Peace, head of European bank research at Nomura, said: “It is an evolution of the crisis from three years ago, when countries took on the risks of the banks. Back in 2008, there was a lender of last resort – countries bailed out banks. This time it is governments that need a lender of last resort – but there is no obvious lender of last resort.”

The next crisis could be worse than 2008. The numbers are larger. Then, the crisis was confined to the United States. Today, it is all over Europe: countries and banks. Also, response time is slow, unlike the fall of 2008.

While the massive bank bailouts of October 2008 – in the month after Lehman collapsed – worked for a while in shoring up banks, confidence is again ebbing , even though the banks are much stronger then they were three years ago. This time the problems for banks is not the holes ripped through their books by exposure to US sub-prime loans, but their exposure to the governments of the eurozone – which are in turn searching for their own bailouts.

Then, it was banks. Today, it is banks and nations. This has not been seen in the post-World War II era. We are in uncharted waters. We have entered the rapids.

John Higgins of Capital Economics said: “We are in the latest leg of a crisis that began several years ago, but this time the source of the banks’ concerns is not their exposure to asset-backed securities and more about exposure to sovereign debt. And there is the concern about the ramifications of the break up of monetary union.”

As the article says, “The risk of the eurozone imploding is being taken seriously by regulators.”

Ratings agency Standard & Poor’s added to the collection of banks’ problems yesterday by reducing the ratings of a raft of banks – including that of Dutch bank Rabobank, which had been the last bank in the world to have a triple-A rating.

Confidence is fading. It will fade even faster.

Robert Talbut, chief investment officer at Royal London Asset Management, said: “There is a belief that fiscal consolidation on its own, if replicated by a large number of countries, is ultimately unsustainable. If everybody is cutting, then growth is damaged for everyone, with the real danger that company and consumer confidence spirals downward leading to further falls in growth and a collapse in confidence in the whole financial and business system,” he said.

“Once you start to undermine confidence in the sovereign debt markets, and therefore banks, you cause huge problems for banks as they attempt to fund both themselves and their customers.”

Read the entire article.

Continue Reading on www.guardian.co.uk

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