Euro banks now borrowing from businesses instead of lending to them
In what can only be described as Bizzaro world, or some form of alternate reality, an unusual trend is now taking place in the Euro Zone where banks are actually borrowing money from businesses to stay solvent, instead of the banks lending to businesses for the same purpose. In a report from January 9th, a source within the European banking industry specified that American and European companies were actually lending cash to European banks to allow them to remain solvent, and acquire capital funding.
Blue-chip names like Johnson & Johnson (JNJ.N), Pfizer (PFE.N) and Peugeot (PEUP.PA) are among firms bailing out Europe’s ailing banks in a reversal of the established roles of clients and lenders.
One source with knowledge of the so-called repo deals or short-term secured lending, said the two U.S. pharmaceutical groups and French carmaker were the latest to sign up for them.
As a result a group of well-known, cash-rich companies with solid cash flows has stepped in the repo market, which provides a form of lending so far almost exclusively in use between banks, and between banks and central banks.
One market participant said in one key area of lending companies now accounted for 25 percent of these deals. – Reuters
That banks can no longer function simply on central bank intervention and discount window borrowing is a very disturbing scenario that not only exposes how leveraged their own models are, but also how limited central banks such as the ECB and Federal Reserve are today in implenting financial tools to stave off current crises. Additionally, if cash-rich companies in the United States and the Euro Zone find it more beneficial to lend money to banks instead of investing in new jobs, technologies, and growth programs, then it exposes just how dire the economies are in both regions.
Since 2008, banks have continued to invest in sovereign bonds, and multi-national derivatives over lending to small businesses or corporate expansion. Tens of thousands of companies and millions of jobs have been lost because of the failure of the global banking system, and there appears to be little incentive for banks to invest or lend to Western economies and businesses. Most of the money that central banks have lent to the banking industry has been used to buy government bonds, or invest in their own instruments, and the tens of trillions of dollars infused over the past three years has done little to spur economic growth, and even less in employing people who have been out of work for so long.
It is a very strange dichotomy when the lender becomes the borrower, and when banks seek help from businesses. That new paradigm appears to have been breached as European banks are now seeking salvation in borrowing from the very same businesses that just a few years ago, were borrowing from them to facilitate their own growth and expansion.