ECB to Pump Unlimited Bailout Cash into European Banks
December 19, 2011 • 7:35AM

This week, the European Central Bank will be issuing an unlimited supply of three-year bailout cash to the hopelessly bankrupt big European banks. Reuters reported on Friday that ``Europe's intensifying debt crisis has forced the ECB to extend and expand support measures for banks in the euro area which have found it harder to borrow in the interbank market due to their large sovereign debt exposures. A rush by them to borrow the new money could underscore the scale of the problem.'' The new cheap lending by the ECB, scheduled for Dec. 21, is aimed at inducing the banks to buy up European sovereign debt, to profit from the yield differentials. This new hyperinflationary bailout scheme is bolstered by the ECB's lowering of collateral standards. On Dec. 15, Spain held a bond auction and sold twice the amount of four-year bonds as expected. On Dec. 21, European banks can turn in those bonds to the ECB as loan collateral for the cheap money.

Another part of the bailout scheme is also scheduled for this coming week, as eurozone finance ministers confer by phone on Monday on details of a 200 billion euro bailout, to be channeled through the IMF. The plan is for European central banks to ``loan'' 150 billion euro to the IMF, and for those funds to be increased through an additional 50 billion euro in loans from non-European countries. The 200 billion euro will then be used to bailout the European sovereign debt.

These wing-dings are doomed to fail in the short term. When the European heads of state met in Brussels on Dec. 9 and agreed that there would be no further write-down of the bonds, as had been the case with the Greek debt, it was a guarantee of hyperinflationary failure. The European banks, led by the Inter-Alpha banks, are all bankrupt, and the governments are also bankrupt--as the result, in part, of the first round of bank bailouts over the past two years.

The dismal failure of the heads of state summit has not been lost on the criminal rating agencies. Standard and Poors is likely to cut France's AAA bond rating this week, and Fitch announced on Friday that six Eurozone countries, including Italy and Spain, have been put on a watch list and will likely be downgraded in the next 90 days. In announcing the watch status, Fitch analysts wrote that ``a comprehensive solution to the eurozone crisis is technically and politically beyond reach,'' and demanded more bailout commitment from the ECB.

Bloomberg reported on Sunday that the British government is going to announce on Monday that it has adopted the recommendations of the John Vickers-led Independent Commission on Banking. Business Secretary Vince Cable told BBC television, ``Tomorrow, the government is going to launch this initiative on the banks, accepting in full the Vickers commission. We're going to proceed with the separation of the banks, the casinos and the business lending parts of the banks. We cannot risk having a repetition of that financial catastrophe that we had three years ago. We can't have a position where the banks are too big to fail.'' On Monday, Chancellor of the Exchequer George Osborne will go before the House of Commons to announce the fire wall between retail banking, and trading and investment banking. However, the implementation will not take place until 2019.