The Phaserl


Brexit Chaos to Serve as Cover for ECB Bank Bailouts

by Wolf Richter, Wolf Street:

European banking crisis gets impatient.

Over the course of the last few months, Brexit has become one of the biggest catch-all preemptive scapegoats of recorded human history. Even far beyond the old continent’s porous borders, politicians, central bankers, and economists are warning their respective populations to brace for a serious aftershock if the people of Britain vote to leave the EU.

This is is a remarkable feat given that the UK has its own perfectly functioning currency, and as such decoupling from the EU, while bumpy, should not pose an immediate financial threat either to the UK or the EU, let alone the world at large. But try telling that to the eurocrats, politicians, and central bankers whose long cherished dream of creating a seamlessly interconnected, interdependent European superstate appears to be in the process of unraveling.

With no feel-good stories to tell the people of Britain, the only tack they have left is to ramp up Project Fear, which yesterday reached new levels of hyperbole when European Council President Donald Tusk warned that if Britons vote to leave the European Union on June 23, not only could it spell the beginning of the end for the 28-nation bloc but also for western political civilization “in its entirety.”

Even by recent standards, it is an audaciously outlandish claim that serves little purpose but to remind Britain’s wearied voters just how fearful the establishment is of losing control [read: Who’s Really Most Afraid of Brexit? And Why?].

There is also a cynical, opportunistic edge to the pro-EU establishment’s rampant fear mongering. By creating heightened expectations of post-Brexit chaos, if chaos does ensue, it will be able to take advantage of it by plowing even more desperately needed funds into Europe’s ailing banks. Just today, unnamed ECB “officials” leaked to Reuters that the ECB would “backstop financial markets in tandem with the Bank of England should Britain vote to leave the European Union” (emphasis added):

Such an announcement from the ECB would come on June 24 if an early-morning result showed that British voters had chosen to leave the EU, according to the sources. The aim is to underpin investor confidence across Europe and contain further market jitters.

“There will be a statement to do whatever it takes to maintain adequate market liquidity,” said one senior central bank official, who spoke on condition of anonymity.

The ECB’s pledge would involve opening so-called swap lines with the Bank of England, allowing euros and sterling to be exchanged and effectively making unlimited funding in both currencies available to European banks, the sources said.

Granted, if there is a Brexit — and for the moment, that’s still a fairly large “IF” — some form of additional support may well be necessary to calm jittery markets. But if recent history has taught us anything, it is that whenever a central banker uses the words “whatever it takes,” most normal people who are not intimately connected with the central bank in question should be very worried.

The ECB has every reason — or at least believes it has every reason — to unleash yet another tsunami of liquidity across Europe’s financial sector. After a brief respite, Europe’s banking shares are once again slip-sliding toward record depths. The Stoxx Europe 600 banks index is down already over 10% this week alone, 27% year to date, and 37% since June last year.

The most affected institutions include some of Europe’s biggest hitters, from Deutsche Bank and Credit Suisse, both of which hit new record lows today, to HSBC, which hit a new five-year trough this week, and Santander, which is on the verge of breaking through its lowest point since the 1990s.

If Europe’s biggest banks are in trouble, it’s safe to say that Europe’s financial system is too.

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