So now we come to it – the defining moment for the ECB.
The ECB said it would never stoop to buying junk debt/bonds just to bail out an errant nation. This week the markets and the ECB stood toe to toe and looked for weakness; the ECB blinked first and agreed to buy any Greek bonds the banks wanted to unload. It was a test and the bank failed. Call it what you want – prudence in the face of emergency circumstance – I care not – the market knows who’s the alpha and who’s the cur.
So today Financial voices were raised again, this time saying the ECB must consider the ‘nuclear’ option (their word, not mine) of buying the bonds/debt of all its European governments with brand newly printed euros – QE. This is the Rubicon. Cross this and the markets rule absolutely. There will be no one left to call a halt to the banker’s and speculator’s excess and recklessness but you and me. And we will have to do it the hard way.
A year of hearing about decisive action, prudent policies, measured responses, and recovery – and where are we now? Staring at the realisation that all those massive bail outs, by every government, were NOT ENOUGH!
WHY? Why the hell not?
Weren’t all our banks now on the road to recovery? Weren’t they all now so well capitalised they were repaying our cash? We were in profit! There never was any insolvency, right? That was just something put about by people like me who really didn’t understand and were just confusing the worried and the gullible. The banks and experts were right all along, it had all been just a little liquidity problem which we had sorted out by decisive action.
Except it was all as vast a lie as the debts it was based on, could buy. Debt backed LIES.
The banks may lie but their actions betray them. Just like the original crisis when banks would not lend to each other, so now something similar is starting. Only starting mind you. But that it has started at all is the outrage. Banks, just like before, don’t want to lend to each other. Increasingly the banks are charging each other higher and higher rates to borrow for any longer than just overnight. Three month lending is still happening but it is now getting expensive.
Why? Because the banks are hurting again and afraid that one or more of them could collapse. Why would they collapse? Because every bank in Europe is stuffed with bonds issued by European nations. The French, German and Swiss banks have over a hundred billion euros worth of Greek debt/bonds. They all have even more Spanish debt. The Brits are rolling around in it.
As fears of sovereign default or debt restructuring grow so the worth of all those bonds, all that debt, goes down. And this has many nasty effects. It means the banks holding all that sovereign debt are themselves worth less, because what they hold is worth less. Their share prices go down. Their capital holdings shrink. If it goes on, some may have to think again about raising capital. The value of their own debt/bonds goes down. Bail-out anyone?
Because banks count sovereign debt as capital they all use it as collateral. But as the perceived value of that debt goes down so does every banks willingness to accept that debt as collateral for a loan. At least not for as long as three months and not without charging a hefty premium.
No sovereign need actually default for one or more of the banks holding all the sovereign debt, to find borrowing in the markets impossible or too expensive. If one or more of the bank (Fortis, Dexia or a Portuguese bank) goes down there is the risk it could start a domino effect among the banks just as Lehman did.
The first time this happened the banks insisted that their governments take on their debts and give them cash in return. This stuffed nations full of bad debt. Which piled on top whatever debts those nations had accumulated themselves. Now nations find themselves replaying the problem their banks had – bad debts, bad collateral, hard to borrow. And those problems at the sovereign level now ripple back down to the banks who originated the bad debts in the first place.
So nothing, precisely NOTHING has changed except the problem – of the original bad debts – has got MUCH BIGGER. Now instead of banks, we have nations facing collapse. And of course if the nations go, so do their banks. And potentially vice versa.
Noting was ever done about the bad debts. They were merely wheeled from one vault to more spacious ones. Now those vaults are smelling and full. And the banks solution? Easy – Lets just infect an even larger institution with our disease. Let’s wheel the infected paper to an even bigger vault, the ECB’s, and let it rot there.
Now we have come to it. Let’s see what we’re made of.
Yes, Mr. Golem, the "the nuclear option" rather forces itself on the ECB like the "liquidity problem" forced itself on the European governments in the first round of bailouts. I fear the people do not take to the street to protest on issues like quality of security held by ECB. Surely there must be some "body" inside the ECB to fend off such an option? What is the decision making procedure on such a measure and who is involved; politicians? Rubicon crossed will be disaster for the Euro and the EU. Surely this is as evident to the ECB as it is to you or me. The ECB wil be faced with self preservation or destruction. Can this be turning point, when the ECB closes it vaults and forces the institutions to face up to its bad debts, I wonder.
When first it was publizised that the ECB accepted Grrek goveernment bonds in return for Euro liquidity, I got the impression that this was only an option for Greek banks, but now your remarks above seem to imply that any bank in the euozone may offload its Greek bonds on the ECB: What's the reality here?
Dear Eirik,
This rule applies to all banks. Any bank who holds Greek bonds may now use them as collateral. It is clear, therefore, that this action was taken not just to bail-out Greek banks but to save other European banks as well – PNB Paribas has €5B of the stuff. What is left of Fortis (The Insurance company) in Belgium still has €4B round its neck. Their shares lost 10% recently.
Of course European parts of US banks will be quick to use the facility.
It will be a turning point one way or another. The ECB does not yet have the power within Europe to withstand the pressure being brought to bear on it by those governments whose banks would collapse – ie France and Germany. If Trichet was a braver man maybe. But he is not brave enough.
Of course the ECB know. But is there a politician who cares about this longer game? Or would they all prefer to survive today and let damnation catch up with them later?
Dear Mr Eirik,
Have you seen PNB Paribas shares this morning? Profits and sahres up. I wonder how much of the share rise is due to profits and how much to the ECB decision. PNB say they have negligible exposure to Greece. Either they sold – who bought it? – or they mean negligible because they can now unload it at the eECB.
So large parts of the pre-exisisting Greek debt can at will be loadad on to the ECB!? And this is in addition to the recently pledged new money from eurozone members! Mon Dieu, c'est grave!!
But even in politicians' warped world, even politicians leant extremely heavily on by their banks and financial class, must prefer the implosion of their ordinary banks to that of their central bank. In business company law the risque is placed and contained to the the "legs" and the "head" is protected at all costs. It will be too humiliating for Germans and French to have to call in the IMF to bail out the ECB and have its austerity measures imposed on the whole of the eurozone. Surely somebody will now say enough is enough and close the vault.
Dear Mr Eirik,
Don't look to Trichet. I think he is weak. I think he will be forced out the moment Merkel calls his judgement into question.
Look to Germany. Yesterday Merkel stood up and said – my words not hers, but her sentiment – 'We are Europe. What Germany says is what Europe does. They all look to us for our money. Therefore we decide for Europe.' And she is right.
She has to decide should the ECB bail out Europe's banks and probably risk its own destruction? Or should Germany tell the ECB to stand firm. She will do this if she thinks Germany's banks will survive better than anyone else's.
Or she may think to gamble on the EBC managing to QE, keep everyone afloat and somehow still save the euro from destruction.
She may even think, it has occurred to me, that she gambles on ECB QE and then devalues the entire EUro. This I think would work potentially to Germany's favour.
Especially because her get out option is if it all blows up she print Duetsche Marks, withdraws and closes the borders.
Nuclear options indeed. But only a fool wouldn't have thought them all through.
What thinkest thou?
Dear Mr. Golem,
On the personal qualities of Mr. Trichet, I have no opinion, but he probably cannot ignore that the institution he heads can be wiped out, and with it the political project that is Europe (and he himself dismissed and shamed). Letting ordinary banks fail should appear to be of lesser gravity.
Such "raison d'etat" should also weigh heavily for Merkel, better have banks go under than nations and transnational projects, even German banks.
Yes, the devaluation scenario of the Euro may appeal to the Germans – but they are perhaps equally much apalled by the inflation that follows. What sentiment is the strongest?
I think (i. e. hope) that somebody in command will see that the line must be drawn somewhere, sometime, and now is the time.
In fact, now is already much too late…
I couldn't agree more.
But stupidity and the desire to survive the next moment, even if it guarantees worse later, is the essential weakness of almost all of our ruling political class.
I think the German's would let Commerz go if it came to it. Hypo is their AIG. Deutsche is their Too big to fail.
I think we have to be open to the possibility that Germany will sacrifice Europe if it has to rather, than risk all. I don't hold this against them.
But events rule now, not logic.