Where do Banks get the money they lend to our governments?

In my last post, I noted that European Governments have borrowed around €7.8 trillion over the last 20 years, and that in three of those years they have borrowed €1 trillion or more in a single year.

So, here's the €64 billion question. Where did that money come from?

All the European governments have some sort of Debt Management Office (DMO) whose job is to borrow  money. They do this by working with a set of "Primary Dealers" - essentially Commerical Banks. You can find the list of these primary dealers on the European Union's Economy and Finance Committee website.

There is also an organisation called the AFME (Association for Financial Markets in Europe) which produces a 307 page document called the "European Primary Dealers Handbook", that gives details of how this borrowing process is handled in 16 of the main European Countries. They also compile  a table with the list of current Primary Dealers for these countries.

I've rearranged the table so you can see which are the most important Primary Dealers

As you can see, there are some Primary Dealers that are particularly omnipresent. Barclays is used by all 16 countries. Deutsche Bank and HSBC are used by 15 whereas Société Générale is used by 14 countries. BNP Paribas, Citigroup and the Royal Bank of Scotland are each used by 13 countries, whereas Crédit Agricole, Goldman Sachs, J.P Morgan and Noomura are used by 12. And so on.

The table also shows that the number of Primary Dealers varies quite a lot from country to country, from a minimum of 8 in the case of Sweden, to a maximum of 37 in the case of Germany (although Germany says that it doesn't have a true Primary Dealers list.

The rules used by each country are not fixed, but it a number of cases, it is explicitly stated that only Primary Dealers (i.e. Commecial Banks) are permitted to buy government bonds. For example, Austria says "Only Primary Dealers have the right to participate in the Auction Procedure." The German documents stipulate that " Only members of the “Bund Issues Auction Group” may par ticipate in the auctions directly". The Irish documents say  " In order  to par ticipate in Irish Government bond issues, institutions  must be recognised by the NTMA as Primary Dealers." For Slovakia, "Only PDs who have  a valid primary dealer Contract with the ARDAL are authorized to submit  bids  in auctions."

I suspect that even in countries where such rules are not explicitly written, it is nevertheless the case that only Primary Dealers that have the opportunity to purchase government bonds. I have started to ask that specific question to each country's Debt Management Office to check on this.

OK So now we know that Governments will sell their bonds to a selected group of Banks, the next question concerns where the Banks get the money that they use to purchase the bonds.

Of course, we are supposed to believe that these Banks are simply acting as intermediaries for their clients, who could be pension funds and insurance companies for example. We are supposed to believe that those investors give the banks their money, and then those banks use their status as primary dealers to buy up government bonds.

But, as the Bank of England stated clearly last year, when Commercial Banks make loans, they typically don't use money that has been already been deposited with them by savers - they actually create the money.

So, here's my fundamental question.
What percentage of the €7.8 trillion used by primary dealers such as Barclays, Deutche Bank, HSBC, Société Générale etc to buy government bonds was money that existed before the bonds were purchased? And what percentage was simply created out of thin air?
I suspect that it may be very difficult to know the truth, because the entire system is cloaked in mystery. The Debt Management Offices in different countries do not provide precise details about which Primary Dealers actually made the purchases. At best, they may provide a ranked list of the most active Primary Dealers, such as this one provided by the Agence France Trésor.

1 BNP Paribas

2 Société Générale 

3 Crédit Agricole 

4 Barclays 

5 HSBC

6 Natixis 

7 Nomura

8 Morgan Stanley 

9 Royal Bank of Scotland 
10 Crédit Suisse 

The Austrian Tresury also publishes such lists - here's the latest one for 2014, together with the rankings for 2013

1. Société Générale (4.)
2. Barclays (2.) 
3. HSBC France (1.) 
4. Nomura (8.) 
5. Goldman Sachs (6.)
6. Deutsche Bank (5.)
7. UniCredit Bank (9.)
8. Commerzbank (3.)
9. Natixis (11.)  
10. Citigroup (10.) 

I also found rankings for Primary Dealers for the Netherlands here:

1. Commerzbank 

2. ING Bank 

3. HSBC France 

4. Société Générale 

5. Citigroup 

But don't you think that we absolutely need to know the truth for all our governments? And not just rankings, but actual detailed listings of the purchases made by every one of these banks? And we need to know if those Banks used prexisting money, or money they created themselves.

It seems to me perfectly possible that the vast majority of the €7.8 trillion used to buy European Government Bonds in the last 20 years, was simply created out of thin air by commercial Banks. I'm happy to be proved wrong, but until I am, I think that we have to consider this possiblity seriously.

And if that is the case, then I think that every one of us should be denouncing what is effectively a total scam. We have collectively paid over €6.66 trillion in interest charges for borrowing money from Bankers who quite probably didn't have the money that they lent our governments.  It also means that by creating money this way, the Money Supply will have increased by up to €7.8 trillion by the operation of Commercial Banks - an incredibly dangerous and irresponsible scenario. Surely, no responsible Central Bank could allow that to happen?

As I suggested to Alexis Tsipras on my blog,  I think that the Greek government could say that they would be happy to repay any loans (plus the interest) to anyone who could prove that they used preexisting money to buy Greek Government Bonds.  Here is the list of Greece's Primary Dealers (they are all Banks):

• Alpha Bank (Athens)
• Banca IMI (Milan)
• Bank of America  Merrill Lynch (London)
• Barclays (London)
• BNP Paribas (London)
• Citigroup (Athens)
• Crédit  Suisse (London)
• Deutsche Bank (Frankfurt)
• EFG Eurobank-Ergasias (Athens)
• Goldman Sachs (London)
• HSBC (Athens)
• ING (Amsterdam)
• J.P. Morgan (London)
• Morgan  Stanley (London)
• National Bank of Greece (Athens)
• Nomura  (London)
• Piraeus Bank (Athens)
• Royal Bank of Scotland (London)
• Société Générale (Paris)
• UBS (London)
• Unicredit (Milan)

We just have to ask them what was the origin of the money they used to purchase Greek Bonds. If it turns out that they made their bond purchases using money that they created out of thin air, it would dramatically change the nature of the claim on the Greek people.

Finally, let me just note that if you think about the £625 billion that Osborne and Cameron have borrowed over the last 5 years, exactly the same question needs to be asked. Where did that money come from?