Friday, 4 January 2013

Graph of the week: inter-bank transactions

Transactions between Eurozone banks shows an interesting pattern (click to enlarge):

Source: The Economist

It looks like the banks are taking cash away from the PIIGS, Belgium and France, and are moving them mostly to Finland (!?), Germany and the Netherlands. The Finland issue is particularly interesting. Perhaps this has something to do with it: Moody ranked Finland's banking system the strongest in the EU. 

No wonder these countries are having trouble kick-starting their economies; their banks are shrinking assets and are thus lowering the possibility for further credit and deposit creation. As an effect of high risk and uncertainty money is leaving the countries (recall the Spanish situation from June last year) and is further strangling the system. The ECB's help is also pretty useless in this case since the banks are not losing money; they are transferring it to a lower risky environment. Does "doing whatever it takes" by shoveling them with more money (which they end up moving abroad) make any sense then? Not really because none of these attempts will substitute for a proper structural reform in the selected economies.

What's even more worrying with the graph are across the continent reductions in inter-bank loans (except for Italy). This further emphasizes the decline in possible credit creation as banks are finding it less and less reliable to loan to each other - at least across the continent. In Greece both types of asset shrinkage are reaching terrible proportions. It makes me wonder if any recovery will ever be possible in this country. Perhaps after they reform and start growing on the newly acquired strength of their domestic economy will they experience a boom in foreign investment and "bring all this money back". It's a possibility. If they ever make it out (i.e., if they don't end up in radicalism), they are in for a rapid recovery. 

3 comments:

  1. The change required in Greece would have to be both basic and monumental. I do not know if a population trained for decades to rely upon socialism will be able to make the transition.

    Former Communist nations such as yours were better able to change because by the time the communist regimes fell no one really believed in them anymore.

    Perhaps they will surprise me. Perhaps a leader will emerge with a common sense attitude. More likely though a leader will emerge with hateful and radical ideas.

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    1. It's a long shot, I agree. And you’re right, the problem of transition in former socialist countries or countries like Greece is always one of mentality (or we can call it informal institutions). Even after the fall of communist regimes, the mentality hasn’t changed (at least not in the Balkans for example). The people still expect the state to provide them with everything free of charge, thus taking the role of the state more or less for granted. They expect the state to bailout bankrupt businesses in order to prevent job losses, and fight strongly against any restructuring of a fallen state-owned business, and any substantial reform of their unsustainable concessions.

      In order to change this it takes a few generations. A good way to start is to change the formal institutions that will create better incentives for entrepreneurship and risk-taking as opposed to welfare dependency and lethargy. The problem is that this process still hasn’t started, thus further postponing their switch towards an innovative and dynamic society and economy.

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  2. Sorry that I am such a pessimist, but the cynicism of age is what younger people often mistake for wisdom.

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