Both the International Monetary Fund and Mario Draghi have again tried hard over the past 24 hours to conjure a big Eurozone "quantitative easing" scheme into existence, as the European banking system is showing signs of an early "recollapse" which will radiate into U.S. and South American banks.
Draghi, head of the European Central Bank (ECB), spoke at the European Parliament July 15 and claimed that quantitative easing (called "QE") was "squarely within [ECB's] mandate", a highly contested claim in Germany's parliament and courts. That he would make it so baldly was related to the IMF's open demand on July 14: that the ECB carry out, not "just" its new $1.4 trillion two-year program of 1% interest loans to banks, but also, a QE scheme directly aimed at buying up European sovereign debts from the banks — not only in the southern European "problem" countries but all over Europe. The IMF's demand, included in its annual review of the Eurozone economy, was called "a blistering critique of the ECB" by the London Telegraph's financial columnist Ambrose Evans-Pritchard. Draghi's response was essentially to try desperately, again, to achieve by promising loudly, the "results" of what he may be unable to do at all.
The IMF was also blunt about the reason for its own desperation for QE, despite the cover phrases about inflation being too low. "Financial markets are still fragmented, with contracting credit and high borrowing costs constraining investment in countries with large output gaps, large debt burdens and high unemployment," it said. It called for "a large-scale asset purchase programme."
Neither IMF nor any other agency any longer foresees any noticeable economic growth in Europe; continental industrial production is now 12% below the 2008 level, and fell another percent in May.
And why must the ECB buy sovereign debt? Both major reasons point to collapse. First, the rest of the European banks' assets are so toxic they cannot be sold to the ECB; this is referred to as the "lack of quality assets for QE" problem. And second, the governments need credit for both bail-in and bail-out of banks, both of which cost them huge amounts.
In a major sign of the first reason for collapse, Bloomberg News reported July 15 that European banks are trying to quickly sell off roughly $800 billion in real estate assets to "venture" firms in the U.S., featuring Lonestar Capital and Cerberus Capital Partners, at deep distressed-debt discounts. Spanish banks alone have $250 billion of this crap to get rid of — all in an attempt to survive the "stress tests" being done by the ECB this year. They are selling, essentially, foreclosures, in huge blocks of $1 billion at a time. But at the forecast rate, $60 billion will be sold this year, not $800 billion.
At the same time the bank failure epidemic itself is spreading. In Portugal, another division of Banco Espirito Santo Group went bankrupt July 15, defaulting on about $1 billion in recent loans from Portugal Telecom, spreading the stock-price plunge to the latter, and also to Brazil Telecom (Oi Group), with which it was about to merge. Bank lending in Portugal was announced down nearly 9% in the past year.
In Bulgaria, a "good bank-bad bank" resolution for the just-failed CCB bank, announced only July 14, was abandoned July 15 and the government could not agree how to protect deposits over 100,000 euros — bail-in.
The IMF meanwhile urged Austria not to go ahead with its shocking $1.2 billion bail-in wipeout of debts of Hypo Altria bank which had been guaranteed by an Austrian provincial government. It warned Austria that it could collapse other debts similarly guaranteed. Austria announced this bail-in robbery of insurance policy and pension holders, in order to try to keep this failed bank open and operating. And now another, supposedly "healthy" Austrian bank, Erstebank, has announced $2.2 billion in losses and been sharply downgraded by ratings agencies.
So among banking authorities only Fed Chairman Janet Yellen, testifying in the Senate, managed to maintain the requisite air of incomprehensibility today.