European Banks Deleveraging and US Dollar Squeeze Creates Risk-Off Opportunity [Updated]

At one side of the equation is the credit issues and solvency problems of European banks forcing the ECB to lend USD dollars to the Euro-zone banks:

(Bloomberg) — The European Central Bank said it will lend dollars to two euro-area banks tomorrow, a sign they are finding it difficult to borrow the U.S. currency in markets. 

The ECB allotted $575 million in a regular seven-day liquidity-providing operation at a fixed rate of 1.1 percent. It’s the first time since Aug. 17 that a lender requested dollars from the ECB. The spot rate was $1.3625. An ECB spokesman declined to comment on which banks borrowed the funds.

Even if this is done via a swap line with the Fed, it still shows that dollars are still sought after and this should push the USD higher — something hyper-inflationists will still not understand.

And on the other side of the equation, you have the realization from the banks that they need to deleverage and raise cash — if not capital... Well... The realization is only among the smartest banks at the moment. Others will follow, but it will too late.

Here's the news (Bloomberg via ZeroHedge):

*BNP PARIBAS AIMS TO CUT RISK-WEIGHTED ASSETS BY EU70 BLN

*BNP PARIBAS PLANS ADDITIONAL $60 BLN `DELEVERAGE' AT CIB

*BNP CUT $22 BLN OF U.S. DOLLAR CAPITAL-MARKETS ASSETS IN 1H

*BNP AIMS TO REDUCE CIB U.S. DOLLAR BALANCE-SHEET BY $82 BLN

*BNP PARIBAS AIMS TO LIFT CAPITAL RATIO TO 9% BY START OF 2013

These are not trivial amounts. Deleveraging means selling. Selling means lowering prices. The lower the prices, the more others will be forced to follow and sell, and create the vicious selling cycle that can kill any speculator with high leverage — including banks which have a leverage of 30 to 50.

Moreover, this will in the end be deflationary as banks are raising and holding onto cash.

[Update: Here's the quotes from the original Bloomberg report, confirming that lending will be cut and assets sold — both deflationary].

[...] BNP Paribas is taking steps to cut risk-weighted assets by about 70 billion euros ($96 billion) to increase the capital ratio by 1 percentage point under Basel III rules, the Paris- based company said in a presentation on its website today. That will free up about 6 billion euros of capital according to Bloomberg calculations and confirmed by the bank. As part of the effort, the lender is is cutting its corporate- and investment- banking balance sheet by $82 billion.

[...] BNP Paribas’s exposure to the sovereign debt of Greece, Ireland and Portugal is “manageable,” the bank said. In Greece, the company would have a 1.7 billion-euro pretax additional writedown on its sovereign holdings if it took a 55 percent mark-to-market impairment, it said. Any markdown on the Greek sovereign bonds in third-quarter accounts will depend on the implementation of the rescue package agreed to on July 21, which involved a 21 percent writedown on debt maturing by 2020, it said.

French lenders top the list of Greek creditors with $56.7 billion in exposure to private and public debt, according to a June report by the Basel, Switzerland-based Bank for International Settlements. Credit Agricole has an unprofitable Greek subsidiary, Emporiki Bank of Greece SA, while Societe Generale has a controlling stake in Greece’s Geniki Bank SA. BNP Paribas doesn’t have a Greek consumer-banking unit. 

[...] 

BNP Paribas is also aiming for a 9 billion-euro reduction of mortgage lending at its personal-finance division in Spain, the Netherlands, Switzerland, Norway and Hungary, the bank said. The company is seeking to cut lending at the equipment-solutions unit by 3 billion euros as it scales down business in the U.K., Switzerland and Hungary and exits some leasing activities such as real estate, yachts and business jets, it said. [...]