ECB must borrow dollars to meet dollar US bank withdrawals
#1
Posted 13 August 2007 - 07:05 AM
#2
Posted 13 August 2007 - 07:17 AM
#3
Posted 13 August 2007 - 07:21 AM
#4
Posted 13 August 2007 - 07:28 AM
#5
Posted 13 August 2007 - 07:37 AM
#6
Posted 13 August 2007 - 08:17 AM
#7
Posted 13 August 2007 - 09:57 AM
I think the problem is in the Eurodollar market, which is where all liquidity crises have historically started.
Eurodollars are dollar-denominated accounts held by overseas banks.
Because of the huge US current account deficit, the world has been awash in excess dollars. For instance, a lot of petrodollars are held in dollar denominated accounts with European banks. What did European banks do with some of these depositors' dollars ? Invest it in debt securities that have turned illiquid recently. How do they pay back these depositors ? They need dollars, which the ECB cannot print (good as they are at printing).
Thats my read of the situation based on what I've been reading.
I am not a liquidity expert; but, this is INCREDIBLE what you said about eurodollars being used up to purchase CDOs and MBS. This could be the most PROFOUND observation about dollar based financial system. For some time, many have speculated about future of the dollar and potential impact of all those foreign-held dollars being expatriated to US. But, what you are pointing out is that ALL those dollars could've been potentially sapped out and tied up for years in long term mortgage assets. And now we're faced with dollar shortage. Ok, what am I misinterpreting?, as others are calling for financial collapse, while I see successful excess dollar mop-up operation?
#8
Posted 13 August 2007 - 11:12 AM
#9
Posted 13 August 2007 - 11:45 AM
I think the problem is in the Eurodollar market, which is where all liquidity crises have historically started.
Eurodollars are dollar-denominated accounts held by overseas banks.
Because of the huge US current account deficit, the world has been awash in excess dollars. For instance, a lot of petrodollars are held in dollar denominated accounts with European banks. What did European banks do with some of these depositors' dollars ? Invest it in debt securities that have turned illiquid recently. How do they pay back these depositors ? They need dollars, which the ECB cannot print (good as they are at printing).
Thats my read of the situation based on what I've been reading.
I am not a liquidity expert; but, this is INCREDIBLE what you said about eurodollars being used up to purchase CDOs and MBS. This could be the most PROFOUND observation about dollar based financial system. For some time, many have speculated about future of the dollar and potential impact of all those foreign-held dollars being expatriated to US. But, what you are pointing out is that ALL those dollars could've been potentially sapped out and tied up for years in long term mortgage assets. And now we're faced with dollar shortage. Ok, what am I misinterpreting?, as others are calling for financial collapse, while I see successful excess dollar mop-up operation?
Linrom, I dont think ALL those eurodollars were invested in exotic securities. Its a fraction at best though its effect might be greater due to leverage. So I do not believe all those dollars have been soaked up. Besides, those dollars are owed to the holders of those Eurodollar deposits so they need to be paid back.
Secondly the consequence is bearish short term and medium term, not bullish. Part of the rise in the stock market has been due to the same Eurodollars being used to buy equities. European Banks have huge holdings of US stocks. Deutsche Bank holds $200 billion of US stocks, Credit Suisse $100 billion, Societe Generale and BNP Paribas (20-50 billion each).
So, an obvious way for them to find dollars is to cash in their US equity holdings.
What I do not know is how much of these holdings of the European Banks are on their own account and how much in the form of custodian holdings and/or for client accounts.
But clearly the Federal Reserve and the ECB are trying to stop this process in its tracks by providing the needed liquidity to European Banks.
#10
Posted 13 August 2007 - 12:05 PM
I think the problem is in the Eurodollar market, which is where all liquidity crises have historically started.
Eurodollars are dollar-denominated accounts held by overseas banks.
Because of the huge US current account deficit, the world has been awash in excess dollars. For instance, a lot of petrodollars are held in dollar denominated accounts with European banks. What did European banks do with some of these depositors' dollars ? Invest it in debt securities that have turned illiquid recently. How do they pay back these depositors ? They need dollars, which the ECB cannot print (good as they are at printing).
Thats my read of the situation based on what I've been reading.
I am not a liquidity expert; but, this is INCREDIBLE what you said about eurodollars being used up to purchase CDOs and MBS. This could be the most PROFOUND observation about dollar based financial system. For some time, many have speculated about future of the dollar and potential impact of all those foreign-held dollars being expatriated to US. But, what you are pointing out is that ALL those dollars could've been potentially sapped out and tied up for years in long term mortgage assets. And now we're faced with dollar shortage. Ok, what am I misinterpreting?, as others are calling for financial collapse, while I see successful excess dollar mop-up operation?
Linrom, I dont think ALL those eurodollars were invested in exotic securities. Its a fraction at best though its effect might be greater due to leverage. So I do not believe all those dollars have been soaked up. Besides, those dollars are owed to the holders of those Eurodollar deposits so they need to be paid back.
Secondly the consequence is bearish short term and medium term, not bullish. Part of the rise in the stock market has been due to the same Eurodollars being used to buy equities. European Banks have huge holdings of US stocks. Deutsche Bank holds $200 billion of US stocks, Credit Suisse $100 billion, Societe Generale and BNP Paribas (20-50 billion each).
So, an obvious way for them to find dollars is to cash in their US equity holdings.
What I do not know is how much of these holdings of the European Banks are on their own account and how much in the form of custodian holdings and/or for client accounts.
But clearly the Federal Reserve and the ECB are trying to stop this process in its tracks by providing the needed liquidity to European Banks.
LONDON (MarketWatch) -- The European Central Bank on Monday injected another 47.5 billion euros ($65 billion) in loans into the banking system and is reportedly in talks with the U.S. Federal Reserve on a currency swap, so it can provide dollars to European banks struggling to meet money-market needs.
Should the ECB and Fed agree on such a swap, the Frankfurt-based central bank would exchange euros or other currencies it holds for dollars. The ECB and the Fed would then unwind the trade after a fixed term -- say 30 days, as done in the aftermath of the Sept. 11 terrorist attacks -- and the ECB would pay a small amount extra to reflect the 1.25 percentage point gap in the central banks' interest rates.
The ECB, which last week pumped more than 150 billion euros into the European banking system, is reportedly seeking out dollars because of difficulties that European banks are having with funds invested in asset-backed securities, according to several British media reports.
BNP Paribas (FR:013110: news, chart, profile) , one of the largest banks in France, said last Thursday that it would stop valuing three asset-backed securities funds while suspending investor withdrawals. U.S. subprime-mortgage woes, the company said, led to a "complete evaporation of liquidity" -- a notable sign of how housing market troubles in the world's biggest economy are rippling across the globe.
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I have seen figures that show that CDO and MBS market size could be about $7 trillion.