A chart from the International Monetary Fund's global financial stability report shows just how dire the need for cash is for Spanish and Italian banks which are poised to receive fresh funds from the European Central Bank.
The solid lines represent the amount of money flowing into the bank systems. In the past few years, its experienced a steep drop off due to financial woes and concerns about economic stability in Spain and Italy.
The explanation for the rise of the dotted line is a little more complicated. The dotted lines represent liabilities from Target2, which stands for Trans-European Automated Real-time Gross settlement Express Transfer system. It's a system operated by the European Central Bank (ECB) and is the second version of a way countries in the Eurozone pay each other. Target2 makes ECB a middle man for Eurozone countries, meaning purchases between countries go through ECB before being completed, explains Adolfo Laurenti, the deputy chief economist at Mesirow Financial in Chicago.
The dotted line of liabilities means the ECB is postponing the flow of money from Spain and Italy to other Eurozone countries, Laurenti tells us. It shows just how much liability Spain and Italy are racking up. In the past, private banks have been able to lend out money without too much help, as shown by the dotted line hugging the x-axis from 2001 to about 2007.
"ECB has some discretionary powers when the actual flow of money is taking place," Laurenti told us. "Right now they are exacting those discretionary powers in order to help the banking system in Italy and Spain in a tougher spot."
In other words, confidence in banks is so bad (downward falling solid line) that the banks are piling up liabilities with the ECB (upward rising dotted line) to relieve stress.
Some prominent economists have decried the ECB's postponements as a subtle form of a bailout, including prominent German economist Hans-Werner Sinn, president of the Ifo Institute for Economic Research. Sinn sees the use of ECB credits--versus the use of private cash from banks--as a way for a country to live beyond its means when private banks have run out of cash, a controversial stance since some worry the ECB lacks democratic accountability. But others, including Laurenti, see it as a reasonable tool to relieve financial stress in struggling countries such as Spain and Italy.