September 14, 2007--The Financial Times Deutschland today reveals that Barclays and other UK large banks are borrowing large amounts of money from the European Central Bank (ECB) and turning this into dollars, in order to liquidate their U.S. mortgage positions.

On Wednesday alone, the ECB loaned 75 billion Euro in three-months tenders to respond to emergency requests from 140 banks. The singularity is that, for some reasons, the Bank of England does not (up until's today's bailout of Northern Rock) do that job, i.e. providing British banks with urgently-needed liquidity. Thus, British banks, which are not in the Euro system, nevertheless have moved through their Eurozone subsidiary to get the money from the ECB.

The explanation the FT (and FTD) provides is a policy conflict between the BoE and the ECB, but a banking source reached by EIR this morning gave another story. The Bank of England facility, the source said, is a nominal one, and additionally has penalty interest rates. This means, that if a large bank calls for help, this is immediately on record, and its reputation is damaged. The ECB facility is cheap and confidential -- unless someone leaks it, as it was the case today with Barclays. "It is a game, but the ECB is forced to play it because if they let one bank go, the whole system goes", the source said.

The source also said that Eastern European countries with trade and current account imbalances, such as Hungary, Rumania, Turkey (and, in the second tier, Poland), should be monitored, as capital inflows are drying up as a result of the world liquidity crisis. International capital flows back in order to bailout hedge funds and banks, and this could unleash a crisis of the so-called "emerging markets".