The European Central Bank has become so indebted is starting to look like Lehman Brothers, says author Satyajit Das.
The ECB lent a trillion euros ($1.29 trillion) at super-low interest rates to European banks through its long-term refinancing operation (LTRO). Its balance sheet is close to 3 trillion euros, a 30 percent increase since November 2012, Das said, according to CNBC. It's leveraged at about 38 times counting its own capital and capital of eurozone central banks.
European banks have borrowed from the ECB at 1 percent and lent to eurozone countries at high rates. That has kept peripheral eurozone countries from defaulting — but only in the short term and has not reduced their debt or addressed the eurozone's fundamental problem, Das said, according to CNBC.
Like many economists, Das says the fiscal tightening that was supposed to reduce debt has instead created a recession and increased government debt.
"Unless additional rounds of LTRO are offered, interest rates are likely to return to market levels," Das said.
“As with the sovereigns, the LTRO does not solve the longer term problems of the solvency or funding of the banks, which now remain heavily dependent on the largesse of the central banks,” Das told CNBC.
“It is a government-sponsored Ponzi scheme where weak banks are supporting weak sovereigns, who in turn are standing behind the banks — a process which can be described as two drowning people clinging to each other for mutual support.”
Despite the LTRO, the eurozone faces another two or three years of crisis, said the head of Group BPCE, a French mutual lender, reported Dow Jones Newswires. The eurozone is going through a zone of turbulence that is long term," said Francois Perol. "The two to three years to come for the eurozone will be difficult."
BPCE borrowed from the ECB but plans to return the funds, he said.
For us it is a safety net. Every night I put several billion at the ECB because it is a guarantee of security for the bank and that is worth more to us than extra credit for 20 years, for example."
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