12 replies to this topic

[humble1]

this is what i think i heard: the ECB requested an emergency dollar injection this morning because of the "demand" for dollars from US banks in the ECB. now, that sounds to me like depositors are pulling down, cashing in, withdrawing, demanding (or whatever you want to call it) DOLLARS out of the US bank accounts based in the ECB. this sounds like a run, or the start of one. i tried to think of a benign explanation for this emergency demand but i cannot think of one. can anyone here elaborate ? a SERIOUS discussion of this would be welcomed. i know we are not going to hear ANYTHING alarming from the commentators (like leisman) when they report this, so we have to read the tea leaves OURSELVES. please put YOUR reading glasses on and help me !

[NAV]

humble1, Bank run ?? - IMO, these kind of problems surface only after a protracted decline in the stock market. Not near bull market highs.

[kaiser soze]

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.

[humble1]

nav: thanks for your comment; that is an interesting historical perspective. offhand, i cannot bring to mind a lot of bank runs, unless i think of currency crises as bank runs. that would lead me to the asian contagion. in that case (i am not saying this is an analogue, just examining the bank/currency run idea) the bank crisis did start early on. __________________________________________________________ kaiser: yes, i had not thought of the direct eurodollar link, which is exactly correct. thank you for that (better) explanation. so, it seems that this is a development worth watching rather closely, eh ?

[kaiser soze]

humble1, you bet we need to watch developments closely. But money is not likely to be made following the news but anticipating how the big players may react. I note that some European banks are currently the largest holders of some ETFs listed here in the US. Characteristically, they bought in heavily from Mar to June, near the top of the market. They probably are invested through their clients and not their own capital. Nevertheless, that is an attractive source of dollars should they need them badly. KS

[Cirrus]

Part of the plan/solution... Increase global liquidity, especial in the US, without sacrificing the dollar (79-80 must hold). Therefore, the Fed has to watch their aggressiveness for now (liquidity, rate decrease). They will get help from other CBs. Reckless action could further launch certain commodities and really hurt the dollar. A mini panic rally in the dollar combined with excess liquidity would be the perfect medicine. You potentially bring down commodities (very temporarily IMHO) and perhaps set the stage for more future liquidty and a window to lower rates in the US to help the US homeowner. Lets see what happens....

[linrom1]

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?

[humble1]

but won't the dollars being withdrawn (the reason for the ECB emergenncy $$$ demand) show up somewhere else, now in a more liquid state than invested, as they were, thus more on the market ? anyway: thanks to everyone for a very helpful discussion, one without any snide or sarcastic cooments. regards to you !

[kaiser soze]

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.

[linrom1]

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.

Link

I have seen figures that show that CDO and MBS market size could be about $7 trillion.