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Deepening Global Financial Trouble

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Deepening Global Financial Trouble - by Stephen Lendman

Troubled Eurozone economies spread contagion globally

Desperate times call for desperate measures, especially for troubled Eurozone economies. 

Trapped under euro straightjacket rules, everything tried so far failed, despite hooplas announcing each new plan.

On December 21, the big overnight news highlighted demand for long-dated European Central Banks (ECB) loans drawing 489 billion euros, more than expected. A total of 523 banks borrowed money. In response, Capital Economics' chief European economist Jonathan Loynes said:

"While this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain skeptical of the idea that the operation will ease the sovereign debt crisis as banks use the funds to purchase large volumes of peripheral government bonds."

"Does it solve problems? Clearly not. Italy and Spain have serious deficits," said Rathbone Brothers fund manager David Coombs.

FXPro Group's chief economist Simon Smith said "(m)ore important than the size of the (injection) is what banks do with this cash." Don't expect added lending to follow or other actions to ease crisis conditions.

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According to Royal Bank of Scotland's chief economist Jazques Cailloux, "it's not going to bring about a turning point in this crisis." Societe Generale's Sebastien Galy agreed in a statement highlighting Europe's unresolved "deep-seated" problems.

In fact, overnight ECB loans show tight interbank lending problems. They also reveal how banks are pressured to buy sovereign government bonds in an attempt to lower rates at a time their own solvency is shaky. 

Injecting more liquidity instead of addressing problems responsibly does little more than provide a short-lived holiday season sugar rush. It won't last as major problems are unresolved and worsening.

Most of all, European banking is in crisis at a time six or more troubled Eurozone countries teeter on collapse.

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So far, yields in Italy and Spain are up, not down. Moreover, banks are deleveraging to reduce, not expand, their balance sheets. Given how much remains unresolved, another EU summit is planned for January 30, despite 19 previous failed plans.

In these troubled times, S&P rates only 17 countries AAA out of 127 they cover. Of these, six are on negative credit watch so only 11, in fact, are AAA. It's the lowest read since 1994. 

Moreover, since the mid-1970s, never have so many AAA countries been viewed negatively. It suggests others  joining them in 2012 given the fragility of global economies.

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