雅思阅读：The screw tightens

　　雅思阅读：The screw tightens

　　ONE can almost hear the gates clanging: one after the other the sources of funding for Europes banks are being shut. It is a result of the highly visible run on Europes government bond markets, which today reached the heart of the euro zone: an auction of new German bonds failed to generate enough demand for the full amount, causing a drop in bond prices .

　　Now another runmore hidden, but potentially more dangerousis taking place: on the continents banks. People are not yet queuing up in front of bank branches . But billions of euros are flooding out of Europes banking system through bond and money markets.

　　At best, the result may be a credit crunch that leaves businesses unable to get loans and invest. At worst, some banks may failand trigger real bank runs in countries whose shaky public finances have left them ill equipped to prop up their financial institutions.

　　To make loans, banks need funding. For this, they mainly tap into three sources: long-term bonds, deposits from consumers, and short-term loans from money markets as well as other banks. Bond issues and short-term funding have been seizing up as the panic over government bonds has spread to banks . This blockage has been made worse by tighter capital regulations that are encouraging banks to cut lending .

　　Markets for bank bonds were the first to freeze. In the third quarter bonds issues by European banks only reached 15% of the amount they raised over the same period in the past two years, reckon analysts at Citi Group. It is unlikely that European banks have sold many more bonds since.

　　Short-term funding markets were next to dry up. Hardest hit were European banks that need dollars to finance world trade . American money market funds, in particular, have pulled back from Europe. Loans to French banks have plunged 69% since the end of May and nearly 20% over the past month alone, according to Fitch, a ratings agency. Over the past six months, it reckons, American money market funds have pulled 42% of their money out of European banks. European money market funds, too, continue to reduce their exposure to France, Italy and Spain, according to the latest numbers from Fitch.

　　Interbank markets, in which banks lend to one another, are now also showing signs of severe strain. Banks based in London are paying the highest rate on three month loans since 2009 . Banks are also depositing cash with the ECB for a paltry, but risk-free rate instead of making loans.

　　That leaves retail and commercial deposits, and even these may have begun to slip away. We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium, an anlayst at Citi Group wrote in a recent report. This is a worrying development.

　　With funding ever harder to come by, banks are resorting to the financial industrys equivalent of a pawn broker: parking assets on repo markets or at the central bank to get cash. We have no alternative to deposits and the ECB, says a senior executive at one European bank.

　　So far the liquidity of the European Central Bank has kept the system alive. Only one large European bank, Dexia, has collapsed because of a funding shortage. Yet what happens if banks run out of collateral to borrow against? Some already seem to scrape the barrel. The boss of UniCredit, an Italian bank, has reportedly asked the ECB to accept a broader range of collateral. And an increasing number of banks are said to conduct what is known as liquidity swaps: banks borrow an asset that the ECB accepts as collateral from an insurer or a hedge fund in return for an ineligible assetplus, of course, a hefty fee.

　　The risk of all this is two-fold. For one, banks could stop supplying credit. To some extent, this is already happening. Earlier this week Austrias central bank instructed the countrys banks to limit cross-border lending. And some European banks are not just selling foreign assets to meet capital requirements, but have withdrawn entirely from some markets, such as trade finance and aircraft leasing.

　　Secondly and more dangerously, as banks are pushed ever closer to their funding limits, one or more may failsparking a wider panic. Most bankers think that the ECB would not allow a large bank to fail. But the collapse of Dexia in October after it ran out of cash suggests that the ECB may not provide unlimited liquidity. The falling domino could also be a shadow bank that cannot borrow from the ECB.

　　Europes leaders are certainly aware of the dangersand are working on solutions. But it would not be the first time that their efforts are overtaken by events.