Economist Hans-Werner Sinn has warned that the euro system of central banks is facing collapse because the ECB, acting as a lender of last resort, has directed such a huge proportion of the total eurozone money creation flow – 68% — towards banks in the struggling economies of Greece, Italy, Portugal and Spain (GIPS) in return for collateral which is significantly overvalued.
These banks in turn often only have the bonds of insolvent country’s as capital, are insolvent and cannot afford to repay loans to German and French banks.
Only 32% — or 180 billion euros — of the financial flows related to eurozone money creation are directed to the other eurozone countries even though these represent 82% of the economic output, Sinn has said.
“The danger goes far beyond the danger to individual countries,” Sinn said.
The German Bundesbank is the main creditor inside the eurozone bank system but it is highly unlikely it will ever see much of the money it has lent again in the name of tax payers.
In breach of ECB rules, Greek, Irish and Portuguese and Spanish banks have been receiving hundreds of billions of euros of special financing from the ECB under the pretext that they are just illiquid — emergency liquidity assistance operations – when these banks are largely insolvent like their governments and highly likely cannot repay the loans made to them by German, French and other commercial banks.
Much of the collateral they have offered in return for loans at benchmark interests is extremely overvalued, research by Der Spiegel revealed.
These banks have, in turn, lent the money to insolvent governments at penal 6% interest rates imposed on countries by the EU and IMF. The banks are using their profits, it seems, to repay debts owned to German and French banks in a huge scam.
In the event of a default or credit event by Greece, Ireland or Portugal, the ECB will have to write down the losses and face the ire of tax payers – one reason the ECB is opposing a default.
The tax payers of the eurozone are set to stump up for the losses amounting to hundreds of billions of euros incurred by the euro system of central banks when th insolvent commercial banks attached to insolvent governments eventually fail.
Even the UK will have to stump up for the inevitable losses to insolvent under the so called emergency liquidity assistance operations in proportion to its central bank share capital even though the UK is not even in the eurozone.
The ECB and eurozone governments seem to be trying to draw out the moment of collapse as long as possible but a collapse is inherent in the Ponzi scheme structure that is emerging.
“By shifting so much of the eurozone’s money creation towards indirect finance of deficit countries, the system has had to withdraw credit from commercial banks in creditor countries. Within two years, he states, the latter will have negative credit positions with their national central banks – in other words, be owed money by them. For this reason, these operations will then have to cease,” explains Martin Wolf in the FT.
Or else the ECB will have to print money to cover the external deficits of the GIPS countries, creating inflation.
Eurozone coins and notes in circulation account for just 9 per cent of broad money (M3) supply. Almost all of the money in a contemporary economy consists of the liabilities of financial institutions inside the eurozone central bank system.