US Federal Reserve’s Bailout of Eurozone Banks via the OIER

Many must be wondering why the Eurozone has signified a fantastic depiction of divergence, specifically booming financial assets even as the economy flounders. 

The Eurozone’s oxymoronic conditions even presents a financial-economic dilemma to analyst such as Stratfor’s George Friedman who has been puzzled by the absence of a banking crisis in the face of economic stagnation. Mr Friedman writes: How could it have such high unemployment rates and not suffer a consumer debt crisis? The climbing rate of unemployment should be hitting banks with defaulted mortgages and unpaid credit card debt. Given the fragility of the European financial system in the past, it seems reasonable that there would be heavy pressure caused by consumer debt.

One possible answer to this is the stealth transfusion scheme being channeled through the US Fed’s Interest on Excess Reserves (IOER) to EU banks and financial institutions

Financial analyst David Stockman at his website calls this a “profit stripping” operations

This profit stripping operation is simple. Foreign banks on Wall Street borrow from money market funds at an infinitesimal 3-6 basis points and then shuffle the loot down to 33 Liberty Street where the New York Fed pays them 25 basis points on the same funds. This gift is known as the IEOR payment for excess reserves. It is a short-term trade which is rolled-over day after day and is absolutely risk free. Both ends of the arb represent money prices that are administered by the Fed, not set by price discovery in the market.

Indeed, as part of its “open mouth” communications policy, the Fed promises to give considerable advance warning as to when the yield on IOER and also overnight money market borrowings is going to change. Accordingly, any foreign bank caught napping long enough to run afoul of a well-telegraphed Fed change in the arb would likely be operating on pre-telegraph technology. That is to say, this Fed sponsored arb is tantamount to owning a printing press. All it takes is a banking license from the state of New York or other US jurisdiction.

And, yes, the parent bank owning a license to print profits in this manner should be domiciled outside the USA. That’s because foreign banks are generally not subject to FDIC levies designed to fund Uncle Sam’s deposit insurance programs—-fees which would bite into the risk free arb described above. By contrast, domestic banks which pay the FDIC fees are largely not involved in this particular free money gambit.

Read the rest here

So the windfall from the US Federal Reserve subsidies may also have been diverted to the Eurozone’s financial markets, where asset inflation helps support the highly levered balance sheets of Euro's banking and financial institutions.

So even if there has been no QE from the ECB, liquidity from the IOER has been spilling over into the Eurozone in order to keep the musical chairs going. Poor American taxpayers.