The credit crunch now threatens the sacrosanct

The deep recession in which the western economies in North America and the Eurozone have dived, has diverted our attention away from the real roots of the problem, which lurk in the in the credit sector. Last week’s bad news brought the issue back. The insolvency and the losses that stalk the Bank of America, Citigroup, the Anglo Irish Bank and the rumors that London has prepared a new “package” to save the rest of the British banking system, came as a dreadful reminder the fire is still burning in the quarters where the toxic bank assets are hidden.

The American government was forced to inject a fresh USD 20 billion as capital participation in the largest US retail bank, the BoA, and along with it guarantee 118 billion of bad assets of this same banking firm. As for the Citigroup, its balance sheet is in such a mess they decided to cut the bank in two. Coming to this side of the Atlantic, the largest Irish bank, the Anglo Irish Bank, was nationalised last week. Then, in London, the government was preparing a new “package” to save what is left private in the British banking system.

It must be reminded that the Gordon Brown government last October nationalised one of the largest banks in the world, the Royal Bank of Scotland. It seems that there is no end to the toxic bank assets which lurk hidden within or without their balance sheet.

Last week however, the news that was even more alarming than the failure of the remaining large banks in the Anglo - American universe, came from Frankfurt, where the European Central Bank decided to continue a cooperation agreement with its Swiss counterpart, to support the solvency of the franc.

Last October, the ECB signed a currency swap agreement with the Swiss National Bank. The obvious purpose was to support the solvency of the Swiss Franc. The reason why the franc needed support was that the country’s banks had undertaken huge obligations in foreign currencies, which exceed the Swiss national income, probably by many times. Who knows how many? Last week this agreement was renewed and extended in volume.

The case is similar with Iceland. That tiny country was one of the richest and most reliable in the world, a kind of small Switzerland. But Iceland’s banks were found at the beginning of credit crisis to have huge obligations in foreign currency. When the banks started to go insolvent the government of Iceland stepped in and nationalised them.

The sums owed by the banks were so huge however that the failure drove into bankruptcy even the country’s finances and the national currency. Unfortunately for Iceland, the country had open accounts with Britain, over fishing rights in the North Atlantic, and nobody came to save it from its destiny.

On the contrary, in the case of Switzerland - along with the ECB - came the American central bank, the Fed, to support the solvency of the franc with foreign swap agreements. Who on earth wants the Swiss banks to fail? In short, nothing has been settled in the credit crunch crisis and the entire world continues to support those who created the problems in the first place.