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Today the European Central Bank meets to leave interest rates at an historic low of 0.75%, fumble through an explanation of what its President Mario Draghi meant when he said the ECB would “do whatever it takes” to save the euro and to signal what those actions might be at its early September meeting.
No one expects the summer to be the time to hit the markets with action. Instead, offer a signal of what is to come, allowing for an orderly response from un-suntanned traders jobbing volume-thinned markets.
But let’s reflect. It would not be the first time such fighting talk has been used by an ECB chief. Before Draghi the eloquent and personable Jean-Claude Trichet dropped refined diplomacy – a feat for a Frenchman – to say he too would do whatever it takes to save the single European currency. But that is his mandate!
I came across a nice clear article which anyone can understand. AP News has included a helpful action hit list of things which the ECB can do to remedy the euro zone’s debt crisis.
Given that the ECB’s powers to intervene are limited it is clear these need to be beefed up to match the power of the Federal Reserve or Bank of England both of whom managed government bond buying, or QE.
If we are to get deficits down, it has to start with lowering the cost of borrowing by euro zone governments. Otherwise all that painful austerity brings only political turmoil, higher unemployment and therefore higher social spending.
It makes sense to give the ECB a clear mandate to do that. At the moment it has to maintain lower inflation, lower interest rates (when possible) and to ensure that these elements are harmonised across the euro zone. With negative yields on German bonds and 20% on Greek paper, it is clear that so far that has not worked.
Hence, the need to produce more firepower for the ECB to buy bonds in the most distressed sovereigns is crucial. The ECB doesn’t need to be coy about this. It does not need to feel it is bailing out or financing governments, which is against Maastricht rules.
It is simply providing the lowest-possible cost of borrowing to governments which trickles through to lower borrowing costs for businesses and households. It is not funding. It is merely keeping the cost of funding down to ensure stability in the financial sector. It should be seen as an extension, not a denigration, of its mandate to keep inflation low.
As AP points out, the EFSF and its successor ESM are unable to do this bidding as they have exhausted cash bailing out Greece, Ireland, Portugal and have claims from Spanish banks and Cyprus to contend with.
But if the ECB was given more firepower to buy debt from the EFSF/ESM it could seriously help damp euro zone interest rates through the backdoor in effect, while relieving the EFSF/ESM. The EFSF and ESM could continue to buy distressed sovereign debt in the knowledge that its purchases were “underwritten” by the ECB.
The other aspect which makes sense is that the ECB quits demanding preferential treatment in getting its money back on bonds it sucks up. This is unfair and unworkable at giving other investors a crucial role in aiding the debt reduction hopes.
Sure there is a possibility that the ECB could lose money. But wait a minute. Haven’t we already lost a mountain of cash adopting the wrong policies and taking far too long to make up minds about how to respond? The inaction of the euro zone from 2008 to early 2010 has made the crisis a whole lot bigger and more expensive.
Although there is a chance that the ECB will make a “loss” that is passed back to the governments it is only the same as the failure of the Crown Prosecution Service to win a high-profile fraud trial at the expense of taxpayers who pay for the CPS. But that doesn’t mean it was wrong to pursue a case!
Taking the right path, even if expensive at the beginning, is seldom wrong. False economies abound in this crisis so we need a little bit of rebalancing please.
Having cited so often the AP story, here it is:
And there is another AP article which is more technical but also points out pitfalls:
Worth read together to give you a rounded view of where we could be headed next in the debt crisis which in six months’ time will have lasted as long as World War Two. This one will be more financially expensive to recover from.