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As I noted in a comment a few days ago, some of the most likely victims of the current banking crisis in Europe are going to be in the US. Yesterday, I talked to a colleague in a big European bank who confirmed this in stark terms: they (and other European banks) have no problem finding long term funding in euros, and are still finding short term funding in dollars, but they are no longer having enough long term funding in dollars.

Which means that European banks have basically stopped lending to US / dollar clients (something which includes the whole shipping and aviation industries worldwide...). And while that may sound innocuous, the underlying reality is that US banks do not do long term lending - close to 100% of long term lending (as opposed to bond financing) in the USA is done by European banks (and a few Japanese and Canadian ones). To give you an example, over 2010, of the 50 largest banks active in project finance (ie long term financing of infrastructure projects like bridges, power plants, hospitals, mines, etc...) in the USA, only a handful were American, with insignificant volumes contributed.

So soon enough, Boeing is no longer going to be able to sell its planes, GE won't be able to sell its gas turbines or wind turbines, construction groups will see big contracts delayed, and, maybe more interestingly, independent oil&gas producers will have more trouble finding money to drill new wells...

US banks find disintermediated finance (underwriting bonds and selling them to investors) more attractive - the real reason of course is that bankers make bigger bonuses selling bonds than negotiating loans, and banks take less risk on their balance sheet if they don't hold the paper (but then nobody knows who really carries the risk, as we've seen). Big US corporations can also find cheap funding on the bond markets. But infrastructure requires long term funding, and can be too complex to explain to investors, so bank lending still dominates that activity. And that means European banks, borrowing dollars from US money market funds and lending long term - the banks' traditional role of maturity conversion (ie using short term deposits to do long term investment). Trust is essential for such activity, and it's disappearing fast.

So strangely enough, the US panic about European banks will likely have real world implications for the economy in the US before they do in Europe.

6:42 AM PT: Action has been taken

Central Banks Boost Dollar Liquidity

Five major central banks will conduct three dollar-liquidity providing tenders before the end of the year in a coordinated move to offset shortages of dollars at European banks and businesses.

U.S. stock futures and European equities jumped on the news. The euro also rallied.


The European Central Bank said Thursday said it has decided in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year."

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