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W5_The+Economist_2011_09_17

W5_The+Economist_2011_09_17 - The euro-zone crisis Fighting...

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World politics Business & finance Economics Science & technology Culture Blogs Debate & discuss Multimedia Print edition Current issue Previous issues Special reports Politics this week Business this week Sep 17th 2011 | ATHENS, FRANKFURT AND LONDON | from the print edition The euro-zone crisis Fighting for its life The euro zone is in intensive care WHAT’S the French for “this sucker could go down”? Echoes of 2008, when the global financial system wobbled and George Bush gave his pithy view of the American economy, now resound on the other side of the Atlantic. Credit- default-swap spreads for European banks, a measure of how costly it is to buy insurance against their default, are at record highs (see chart 1). The rates that banks charge each other for loans in the interbank market are rising, too, as they did then. Rumours swirl and panic flares: shares in BNP Paribas, a well-run French bank, dropped by 12% on the morning of September 13th following reports that no one would lend it dollars. BNP’s denials saw the shares bounce back later in the day. Shares in Société Générale, another French bank, whipsawed too. The French banks’ reliance on short-term dollar funding, which American money-market funds are increasingly leery of providing, is one reason why Moody’s, a ratings agency, downgraded Société Générale on September 14th, though exposure to sovereign default is also a key factor. Meanwhile large banks in Germany, Switzerland and Britain have more cash than they can put to good use as corporate customers shift their deposits from weaker countries or smaller banks. The beneficiaries are loth to tie the cash up in long-term loans because they fear that the flows could reverse at any moment. “It’s hot money,” says one bank chairman. Thus the role of the Frankfurt-based European Central Bank (ECB) grows larger. The northern banks deposit their excess cash there rather than lend in the interbank market. The banks on the periphery increasingly depend on the ECB for liquidity. More than a fifth of Greek bank funding is
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