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Alasdair Macleod: The entire euro system faces failure
By Alasdair Macleod
Thursday, June 8, 2023
In these dog days of summer, there is a new complacency over the financial and economic status of the Eurozone. Inflation is down, bank shares have rallied, and the end of rises in interest rates is in sight.
The lull in bad news conceals a deteriorating situation. In common with other markets, Eurozone bond yields are rising, and banks are now visibly trying to reduce their excessive balance sheet leverage. This is bound to lead to credit shortages in the coming months, maintaining or even driving interest rates higher. Contracting credit could lead to funding dislocations for highly indebted Eurozone governments, all mired in debt traps.
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Presiding over all this is a clueless European Central Bank, long on rhetoric and short on economic common sense. Further, even though it has reduced its balance sheet by a trillion euros, the hidden losses in the euro system wipes out its equity many times over.
How can it recapitalise itself, and how can it underwrite depositors in a deteriorating commercial banking system?
It is a recipe for an entire systemic failure.
(Definitions: The Eurozone is comprised of the European nations that have adopted the euro as their currency. The euro system is the combined network of central banks, comprising the ECB itself and the national central banks.)
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