How Bad Do Things Have To Be For The Fed And The Ecb To Talk Of Easing… On The Same Day

Once again the markets began to tank. And once again several Fed stooges jumped forward to claim more easing could be coming. And so the markets, having failed to understand that the Fed cannot ease despite the Fed failing to unveil QE 3 for EIGHT straight FOMC releases, exploded higher.

We got the same nonsense across the pond where the ECB hinted at more bond purchases. In this case the insanity is of an even greater scope as over 25% of the ECB’s balance sheet is already PIIGS debt AKA toxic garbage.

However, it’s quite telling that both Fed and ECB officials decided it was time for a verbal intervention. The markets normally this behavior was primarily a Fed policy. To see not one but TWO Central Banks engaging in it on the same day smells of real desperation/ concern.

What on earth could the Fed and ECB be so afraid of?

The Bank of International Settlements provides a hint, namely that as of June 2011, EU banks had a liquidity shortage to the tune of some €2.78 trillion.

Quantitative impact study results published by the Basel Committee

The Committee also assessed the estimated impact of the liquidity standards. Assuming banks were to make no changes to their liquidity risk profile or funding structure, as of June 2011, the weighted average Liquidity Coverage Ratio (LCR) for Group 1 banks would have been 90% while the weighted average LCR for Group 2 banks was 83%. The aggregate LCR shortfall is €1.76 trillion which represents approximately 3% of the €58.5 trillion total assets of the aggregate sample. The weighted average Net Stable Funding Ratio (NSFR) is 94% for both Group 1 and Group 2 banks. The aggregate shortfall of required stable funding is €2.78 trillion.

http://www.bis.org/press/p120412a.htm

Mind you, this was back in June 2011… before the market imploded and the ECB plowed some $1+ trillion (less than €800 billion) into the EU banking system. Which begs the question… if banks were experiencing a nearly €3 trillion liquidity shortage in June 2011… how has a measly €800 billion solved this problem?

Simple… it hasn’t. All it’s done was provide some short-term liquidity to try and fool the market into believing Europe’s problems are solved. But they aren’t. You can’t fix a $46 trillion toxic sewer that is leveraged at 26 to 1 by monetizing $1 trillion worth of bonds.

Oh, and another thing, the Bank of International Settlements underestimates the real exposure and dangers facing the EU by an ENORMOUS margin.

Case in point, according to the Bank of International Settlements, TOTAL German bank exposure to Greece is only €2.95 billion (though they state this is only on an immediate borrower basis).

According to even back of the envelope analysis, Deutsche Bank has €2.8 billion worth of exposure to Greece. Deutsche Bank… one German bank… one of the strongest German banks… has Greek exposure equal to 94% of the exposure the Bank of International Settlements’ claims ALL German banks have to Greece.

So… let’s just say that the Bank of International Settlements’ estimates for liquidity issues in Europe might be a little low. Oh heck, let’s just be honest, Europe in general is in MAJOR trouble and will likely collapse in May-June. To see my analysis of just why… click here.