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Europe is even worse off than I thought.

And it looks to me like the Fed’s loan (via swap lines) to the ECB is noncollectable:

  1. Seems Eurozone got caught short USD much like AIG got caught short credit. Now the squeeze is on as the euro falls vs the USD rises. It’s an old fashioned external currency debt problem.
  1. The ECB has borrowed perhaps over $400 billion from the Fed via swap lines, secured by euros, to lend to its banks. Functionally, this is unsecured borrowing. And the amount approved by the Fed grows with each FOMC meeting. To pay it back the ECB has to sell euro and buy $400b, which might be problematic, at best.
  1. National budget deficits are now rising rapidly due to falling revenues and rising transfer payments. They will soon have their hands full funding themselves and will be incapable of funding the needs of the banking system.
  1. Should a run on the banks force the euro payments system to close; the question is how it re-opens.
  1. Reopening the ECB in euros will mean the national governments will have to repay the Fed $400 billion.
  1. If the national governments abandon the ECB and euro, the ECB’s debt to the Fed debt is noncollectable. The Fed’s debt is only with the ECB and not the national governments.
  1. This gives the national governments a powerful incentive, and perhaps no other choice, but to abandon the euro should the payment system fail.
  1. It will also likely mean the national governments will technically default on their euro debt, as they convert the debt to a new currency (or currencies).

Their only hope is a large enough US fiscal package that restores demand for world output.

Like my proposed payroll tax holiday that immediately adds maybe 5% to US GDP.

But the odds of that are not promising.

And the US economy continues to weaken rapidly.

(I own some German credit default insurance and wish I had bought a lot more.)


9 Responses

  1. But the $400B is essentially “funny money”, right? It shouldn’t have any real effect if it disappears?

  2. No warren, don’t let the euro fall, get all your dollars and send to europe, it’s just bowling score anyways, we must save the EURO – stop shorting it you parasites, this is bigger than your bowling score money, this is about terrorists and nation states and people starving to death and shooting each other, greedy bastards, quit thinking in terms of “money” and “bowling score” for once in your life and try to do the right thing, all of you here should send every dollar you have or can get ahold of to europe and save them. Pathetic. You are all so selfish, my bible says only the meek will inherit the earth, I hope you all burn in hell for your greed and selfishness.

  3. “Seems Eurozone got caught short USD much like AIG got caught short credit.
    Now the squeeze is on as the euro falls vs the USD rises.”

    Eurodollar account holders shifting ‘dollar denominated’ accounts to U.S. banks?

    TED spread is indicator of fear of european bank collapse (especially London)?

  4. Them euro boyz holding mortgages better call this sherriff, he aint representin! I remember this movie called robin hood that was sorta like this. Now I am just waitin for those china sheriffs to enforce those copyrights I have on my USA music and dvd’s and fake nike and fake tommy bahama shirts – LOL! Globalization indeed!

    DJ Sheriff In Chicago Area Says Will Halt All Foreclosures -Fox


    The sheriff of Cook County, Ill., which includes Chicago, said he will suspend all foreclosures starting Thursday, Fox News Channel reports. Sheriff Thomas Dart said one-third of the hundreds of foreclosures in the county have affected tenants who are dutifully paying rent, while the owners stopped paying the mortgage. Dart also said he’s already being held in contempt of court for failing to carry out one eviction. The sheriff said he wants affidavits saying that lenders have verified that the occupants being evicted
    are in fact the homeowners. Cook County is the nation’s second-largest county by population, and aside from Chicago includes many suburbs.

  5. 1. It was lent or spent in by some entity in the eurozone, and added to world demand, and weakened the $. paying it back subtracts from demand and strengthens the dollar. if the fed or tsy is going to do deficit spending better to spend it here where we get the real benefit of the goods and services that get bought. but yes, point well taken.

    2. being short the euro should work. more bang for the buck with the default swap. less to lose as premium is very low

    3. my bowling score has been falling rapidly so i’m almost there.

    4. yes, seems that’s happening

  6. Mr Mosler

    #1, Thanks for this site!

    WRT the $400B, I appreciate your concerns but if I look at the collective GDPs of the Eurozone (multiple Trillion euro collective GDPs) this $400B does not look as large “overall”. From this perspective it seems that if it had to the ECB should be able to pay it back over time.

    Are you concerned with short term effects of raising the $400B?

    Or do you think that the real US$ liabilities of the eurozone are much larger than the $400B advanced so far by the US Fed?

    Again thanks for all you do here…

    Resp, Matt Franko

  7. Thanks, nice to be appreciated!

    Yes, the eurozone can handle the 400 billion.

    problem is the ecb is a ‘shell company’ not guaranteed by the national govts who can close it down with no recourse, saving themselves $US 400 billion or however much the ecb actually owes.

    Now I know they are very fond of us over there, but as I think Bob Dylan said, money doesn’t talk, it swears.

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