More Euro Mess

by Michael J. Howell27. March 2013 11:44

We cannot see how the Cyprus news is good, particularly when viewed in context. The ECBs balance sheet has shrunk by nearly 20% over the past six months, thereby depleting overall funding. We acknowledge that this funding may not be needed right now, but that is only (a) because funding markets have not been tested lately, and (b) banks do not want reserves because they too are contracting their balance sheets as lending falls away. This is not good news. It may also reflect the huge skew in Eurozone funding conditions. The still whopping Target2 balances tell us that 'Northern' banks have surplus funds and so can afford to payback long-term loans to the ECB. Yet they do not tell us that the 'Southern' banks are off the ECB drip-feed. Consequently, even a reduction in Target2 balances are not a sufficient condition for the Euro Crisis to end. Troubles likely lie ahead given the skidding levels of our Eurozone liquidity indexes. We have been warned.

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