ECB – LOLR Debate November 28, 2011

Why the ECB refuses to be a lender of last resort | vox – Research-based policy analysis and commentary from leading economists

Should the Fed save Europe from disaster? – Telegraph

New EU Plan Won’t Solve The Problem

Euro Zone: Soros Calls for ECB to Stop the Bond Run – CNBC

FORGET THE IMF: The Onus Is On Germany And The ECB To Fix Europe

The euro is a macro-economic weapon of mass destruction – it simply must be defused. – Telegraph

JPMorgan Joins Goldman Keeping Italy Derivatives Risk in Dark – Businessweek

Euro at a turning point | Presseurop (English)

Debt crisis: CDS market loses its appeal after Greek ‘haircut’ | Business | The Guardian

 

ECB – LOLR November 26, 2011

Paul Craig Roberts – 

On November 25, two days after a failed German government bond auction in which Germany was unable to sell 35% of its offerings of 10-year bonds, the German finance minister, Wolfgang Schaeuble said that Germany might retreat from its demands that the private banks that hold the troubled sovereign debt from Greece, Italy, and Spain must accept part of the cost of their bailout by writing off some of the debt.

The private banks want to avoid any losses either by forcing the Greek, Italian, and Spanish governments to make good on the bonds by imposing extreme austerity on their citizens, or by having the European Central Bank print euros with which to buy the sovereign debt from the private banks. Printing money to make good on debt is contrary to the ECB’s charter and especially frightens Germans, because of the Weimar experience with hyperinflation.

Obviously, the German government got the message from the orchestrated failed bond auction. As I wrote at the time, there is no reason for Germany, with its relatively low debt to GDP ratio compared to the troubled countries, not to be able to sell its bonds.

If Germany’s creditworthiness is in doubt, how can Germany be expected to bail out other countries? Evidence that Germany’s failed bond auction was orchestrated is provided by troubled Italy’s successful bond auction two days later.

Strange, isn’t it. Italy, the largest EU country that requires a bailout of its debt, can still sell its bonds, but Germany, which requires no bailout and which is expected to bear a disproportionate cost of Italy’s, Greece’s and Spain’s bailout, could not sell its bonds.

In my opinion, the failed German bond auction was orchestrated by the US Treasury, by the European Central Bank and EU authorities, and by the private banks that own the troubled sovereign debt.

My opinion is based on the following facts. Goldman Sachs and US banks have guaranteed perhaps one trillion dollars or more of European sovereign debt by selling swaps or insurance against which they have not reserved. The fees the US banks received for guaranteeing the values of European sovereign debt instruments simply went into profits and executive bonuses. This, of course, is what ruined the American insurance giant, AIG, leading to the TARP bailout at US taxpayer expense and Goldman Sachs’ enormous profits.

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If any of the European sovereign debt fails, US financial institutions that issued swaps or unfunded guarantees against the debt are on the hook for large sums that they do not have. The reputation of the US financial system probably could not survive its default on the swaps it has issued. Therefore, the failure of European sovereign debt would renew the financial crisis in the US, requiring a new round of bailouts and/or a new round of Federal Reserve “quantitative easing,” that is, the printing of money in order to make good on irresponsible financial instruments, the issue of which enriched a tiny number of executives.

Certainly, President Obama does not want to go into an election year facing this prospect of high profile US financial failure. So, without any doubt, the US Treasury wants Germany out of the way of a European bailout.

The private French, German, and Dutch banks, which appear to hold most of the troubled sovereign debt, don’t want any losses. Either their balance sheets, already ruined by Wall Street’s fraudulent derivatives, cannot stand further losses or they fear the drop in their share prices from lowered earnings due to write-downs of bad sovereign debts. In other words, for these banks big money is involved, which provides an enormous incentive to get the German government out of the way of their profit statements.

The European Central Bank does not like being a lesser entity than the US Federal Reserve and the UK’s Bank of England. The ECB wants the power to be able to undertake “quantitative easing” on its own. The ECB is frustrated by the restrictions put on its powers by the conditions that Germany required in order to give up its own currency and the German central bank’s control over the country’s money supply. The EU authorities want more “unity,” by which is meant less sovereignty of the member countries of the EU. Germany, being the most powerful member of the EU, is in the way of the power that the EU authorities desire to wield.

Thus, the Germans bond auction failure, an orchestrated event to punish Germany and to warn the German government not to obstruct “unity” or loss of individual country sovereignty.

Germany, which has been browbeat since its defeat in World War II, has been made constitutionally incapable of strong leadership. Any sign of German leadership is quickly quelled by dredging up remembrances of the Third Reich. As a consequence, Germany has been pushed into an European Union that intends to destroy the political sovereignty of the member governments, just as Abe Lincoln destroyed the sovereignty of the American states.

Who will rule the New Europe? Obviously, the private European banks and Goldman Sachs.

The new president of the European Central Bank is Mario Draghi. This person was Vice Chairman and Managing Director of Goldman Sachs International and a member of Goldman Sachs’ Management Committee. Draghi was also Italian Executive Director of the World Bank, Governor of the Bank of Italy, a member of the governing council of the European Central Bank, a member of the board of directors of the Bank for International Settlements, and a member of the boards of governors of the International Bank for Reconstruction and Development and the Asian Development Bank, and Chairman of the Financial Stability Board.

Obviously, Draghi is going to protect the power of bankers.

Italy’s new prime minister, who was appointed not elected, was a member of Goldman Sachs Board of International Advisers. Mario Monti was appointed to the European Commission, one of the governing organizations of the EU. Monti is European Chairman of the Trilateral Commission, a US organization that advances American hegemony over the world. Monti is a member of the Bilderberg group and a founding member of the Spinelli group, an organization created in September 2010 to facilitate integration within the EU.

Just as an unelected banker was installed as prime minister of Italy, an unelected banker was installed as prime minister of Greece. Obviously, they are intended to produce the bankers’ solution to the sovereign debt crisis.

Greece’s new appointed prime minister, Lucas Papademos, was Governor of the Bank of Greece. From 2002-2010. He was Vice President of the European Central Bank. He, also, is a member of America’s Trilateral Commission.

Jacques Delors, a founder of the European Union, promised the British Trade Union Congress in 1988 that the European Commission would require governments to introduce pro-labor legislation. Instead, we find the banker-controlled European Commission demanding that European labor bail out the private banks by accepting lower pay, fewer social services, and a later retirement.

The European Union, just like everything else, is merely another scheme to concentrate wealth in a few hands at the expense of European citizens, who are destined, like Americans, to be the serfs of the 21st century.

» Bankers Have Seized Europe: Goldman Sachs Has Taken Over Alex Jones’ Infowars: There’s a war on for your mind!

ECB – LOLR Germany Under Pressure by Financial Forces

Paul Craig Roberts: Germany’s Failed Bond Auction was Orchestrated by the Banks – YouTube

As Crisis Mounts, Europe’s Central Bank Stands Back – CNBC

To some people, the European Central Bank seems like a fire department that is letting the house burn down to teach the children not to play with matches.

AP

The E.C.B.  has a fire hose — its ability to print money. But the bank is refusing to train it on the euro zone’s debt crisis.

The flames climbed higher Friday after the Italian Treasury had to pay an interest rate of 6.5 percent on a new issue of six-month bills — more than three percentage points higher than a similar debt auction on Oct. 26. It was the highest interest rate Italy has had to pay to sell such debt since August 1997, according to Bloomberg News.

But there is no sign the E.C.B. plans a major response, like buying large quantities of the country’s bonds to bring down its borrowing costs. The E.C.B. “is not the fiscal lender of last resort to sovereigns,” José Manuel González-Páramo, a member of the executive board of the bank, told an audience at Oxford University on Thursday, a view that has been repeated by members of the bank’s governing council in recent weeks.

To many commentators, the E.C.B.’s attitude seems so incomprehensible that they assume the central bank is just putting pressure on politicians to make sure they keep their promises. Rather than let the euro break apart, the thinking goes, the bank will eventually relent and drench the economy with cash as the United States Federal Reserve and Bank of England have done.

But another possibility is that when the E.C.B. says “no,” it in fact means “no.”

“I think markets are going up a blind alley thinking there’s going to be a common euro bond or thinking that the E.C.B. is going to act as a lender of last resort,” Norman Lamont, the former British finance minister, told Bloomberg on Friday. “I think Germany would rather leave the euro than see the E.C.B.’s integrity affected.”

Instead, the E.C.B. insists, euro area governments must amend their errant ways. “Governments need to ensure, under any circumstances, the achievement of announced fiscal targets and deliver the envisaged institutional and structural reform programs,” Mr. González-Páramo said in London on Friday.

E.C.B. policy makers have been consistent in arguing that huge purchases of government bonds would violate the bank’s mandate and not solve the crisis.

Mr. González-Páramo even accused investors of cynical self-interest when they pleaded for a European version of quantitative easing, the use of large purchases of securities to encourage economic growth.

 

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“Market participants that call for the E.C.B. to play this role may care only about the nominal value of their assets and the need to avoid losses,” he said in Oxford.

To outsiders, it may seem that the E.C.B., based in Frankfurt and steeped in the conservative culture of the Bundesbank, would rather let the euro go up in smoke than compromise its principles. But policy makers do not see the choice in those terms.

To them, the best way to address the crisis is to stick to principles, the most important of which is preserving price stability. That is set out in the first sentence of the statute that defines the E.C.B.’s tasks. “The primary objective” of the European system of central banks “shall be to maintain price stability,” the statute reads.

E.C.B. policy makers also believe that their charter forbids them from using bank resources to finance governments. If they expanded the money supply to provide debt relief to Italy, policy makers believe, they would be breaking the law. They would also effectively be transferring the debt burden from countries like Greece and Italy to countries like Germany or the Netherlands.

The E.C.B. has been buying Italian government bonds and debt from other troubled countries, but in relatively modest amounts and always on the ground that intervention was needed to maintain control over interest rates and prices.

Mr. González-Páramo argued this week that the restriction on E.C.B. action, far from a handicap, was a good thing. It helps policy makers resist the temptation to print money rather than make painful changes.

“The monetary financing prohibition, in this way, is a spur towards better policies and better governance — in other words, a closer economic union,” Mr. González-Páramo said in the Oxford speech, which encapsulated arguments made by other top E.C.B. officials.

But there might be a situation in which the E.C.B. would intervene significantly in bond markets. If there were credible signs that inflation was coming to a standstill and that deflation threatened, the bank would have a strong justification for pumping up the money supply.

“Things would be very different if the E.C.B. started to think there is a risk of deflation,” said Eric Chaney, chief economist of the insurer AXA Group. “In that case, there would be a good reason to buy bonds, to lower interest rates. Then it would be done for price stability objectives, not for saving Country X or Y.”

 

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Inflation in the euro area is 3 percent on an annual basis, still above the E.C.B. target of about 2 percent, though the central bank has forecast that price pressures will ease as the economy slows.

The E.C.B., though formally immune from political influence, would in practice need the approval of European governments, especially Germany, to intervene. Any move would have to be tied to new treaty provisions to enforce greater spending discipline on governments in the future, said Daniel Gros, director of the Center for European Policy Studies in Brussels.

For now, opponents of greater bond buying on the E.C.B. governing council appear to hold sway. Jens Weidmann, president of the German Bundesbank and an influential council member, has been particularly vocal.

If there are members of the 23-member council who favor some form of quantitative easing, they have been quiet about it. But Mr. Gros said support could grow as borrowing costs soar in more countries.

Despite acute tensions on markets, policy makers argue that the crisis is not as acute as it seems, and they refuse to be rushed into making decisions they might later regret.

If the E.C.B. miscalculates, though, the result could be breakup of the euro area. Mr. Gros said it was reassuring that Mario Draghi, president of the E.C.B. since the beginning of the month, seemed to have an impressive grasp of market dynamics.

“He has a lot of experience in the markets,” Mr. Gros said of Mr. Draghi, an economist who worked briefly at Goldman Sachs before becoming governor of the Bank of Italy and then E.C.B. president.

“I presume Draghi has all the market information in real time at his disposal,” Mr. Gros said. “What can we do but trust him?”

Steve Keen Explains 40 Year Ponzi Debt System Collapse November 25, 2011

Max Keiser on Europe’s Brave New Debt – YouTube

Economist Steve Keen; bankrupt banks, nationalise financial system – YouTube

ECB – LOLR – Pressgang November 23, 2011

Europe’s Banks, Squeezed for Credit, Borrow From E.C.B. – NYTimes.com

RANKFURT — Banks clamored for emergency funds from theEuropean Central Bank on Tuesday, borrowing the most since early 2009 in a clear sign that the euro region’s financial institutions are having trouble obtaining credit at reasonable rates on the open market.

Indebted governments among the 17 members of the European Union that use the euro are also finding it harder to borrow at affordable rates as investors lose confidence in their creditworthiness.

In a Tuesday auction, the Spanish treasury, for example, was forced to sell three-month bills at a price to yield 5.11 percent, more than double the 2.29 percent interest rate investors demanded at a sale of similar Spanish securities on Oct. 25. Spain also sold six-month debt at 5.23 percent Tuesday, up from 3.30 percent in October.

Italy’s 10-year bond yield, meanwhile, edged up once again — to nearly 6.8 percent Tuesday — as foreign investors withdrew their money from that debt-staggered country.

Together, the commercial banks’ heavy reliance on the central bank to finance their everyday business needs, along with the growing borrowing burden for Spain and Italy, raise the risk of failure for some banks within the countries that use the euro and the danger that nations much larger than Greece could eventually seek a bailout or be forced to leave the euro currency union.

European stocks were down broadly on Tuesday’s gloomy news. In the United States, stocks closed lower, too, but were not down as much as they had been before the International Monetary Fund announced at midday that it would extend a six-month lending lifeline to nations that might seek it in response to the euro zone crisis.

At the same time, though, the central bank continued to resist calls that it stretch its mandate and expand the money supply, as the United States Federal Reserve and the Bank of England have done.

The European debt crisis has crimped the flow of funds to banks by raising doubts about the solvency of institutions with a large exposure to European government debt. In particular, American money market funds have severely cut back their lending to European banks in recent months, leading many institutions to turn to Europe’s central bank.

Compounding the problem, many banks using the euro have also had trouble selling bonds to raise money that they can lend to customers. That raises the specter of a credit squeeze that could amplify an impending economic slowdown. In addition, some banks may fail if they are unable to raise short-term cash.

The central bank said Tuesday that commercial banks had taken out 247 billion euros, ($333 billion), in one-week loans, the largest amount since April 2009. And the 178 banks borrowing from the central bank on Tuesday compared with the 161 banks that borrowed 230 billion euros ($310 billion) last week.

Since 2008, the central bank has been allowing lenders to borrow as much as they want at the benchmark interest rate, which is now 1.25 percent. Banks must provide collateral. But the central bank is not supposed to prop up banks that are insolvent, only those that have a temporary liquidity problem.

And while the central bank has been buying bonds from countries like Spain and Italy to try to hold down their borrowing costs, the amount —195 billion euros ($263 billion) so far — is modest compared with the quantitative easing employed by other central banks like the Fed.

A growing number of commentators say the European Central Bank should be authorized to buy government bonds at levels sufficient to stimulate the economy.

“It is essential to have a central bank free to use all the levers, including variants of quantitative easing,” Adair Turner, chairman of Britain’s bank regulator, the Financial Services Authority, told an audience in Frankfurt late Monday. The audience included Vítor Constâncio, vice president of the central bank.

Richard Koo, chief economist at the Nomura Research Institute, wrote in a note Tuesday that “the E.C.B. should embark on a quantitative easing program similar in scale to those undertaken by Japan, the U.S. and the U.K.”

“Doubling the current supply of liquidity,” Mr. Koo said, “would not trigger inflation and would enable the E.C.B. to buy that much more euro zone government debt.”

But there has been no sign the central bank will budge from its position that it is barred from financing governments, and that purchases of government bonds are justified only as a way of keeping control over interest rates and fulfilling the bank’s main task to keep prices stable.

“By assuming the role of lender of last resort for highly indebted member states, the bank would overextend its mandate and shed doubt on the legitimacy of its independence,” Jens Weidmann, president of the German Bundesbank and a member of the central bank’s governing council, said Tuesday in Berlin.

“To follow this path would be like drinking seawater to quench a thirst,” he said.

Lucas D. Papademos, the new prime minister of Greece and a former vice president of the central bank, met with Mario Draghi, the central bank’s president, when he visited the bank on Monday. The bank did not disclose details of their discussions, but Greece’s fate is to a large extent in the central bank’s hands. Because of its bond purchases, the central bank is the Greek government’s largest creditor, and the bank is one of the institutions that determines whether Greece will continue to receive aid from the 17 European Union members that use the euro.

ECB – LOLR Showdown November 22, 2011

Germany Should Take Wisdom From Keynes Instead of Weimar: View – Bloomberg

GERMANY IS ALSO TO BLAME IN THE EURO CRISIS | PRAGMATIC CAPITALISM

Credit Suisse Goes For Broke: Predicts End Of Euro, Escalating Bank Runs On “Strongest European Banks” | ZeroHedge

Myth of German economic discipline | Presseurop (English)

The Complete And Annotated Guide To The European Bank Run (Or The Final Phase Of Goldman’s World Domination Plan) | ZeroHedge

DYLAN GRICE: Germany Is Making The Same Mistake That Allowed The Nazis To Come To Power

Deutsche Bank Could Transfer Financial Contagion: Simon Johnson – Bloomberg

CRASH 2: WHY TOO MANY POLICIES & TOO MANY PITFALLS WILL SINK GERMANY’S EU INTEGRATIONIST STRATEGY | The Slog

ECONOMIST: Bernanke Is Going To End Up Bailing Out All Of Europe

Is Goldman Sachs Poised to Takeover Europe? » Counterpunch: Tells the Facts, Names the Names

$600 trillion derivative time-bomb: the day the glass ceiling finally cracks | The Extinction Protocol: 2012 and beyond

Prison Planet.com » If There Is a Run on the Banks, Know Who To Blame

 

Germany – ECB – Lender of Last Resort November 21, 2011

The ECB becoming the lender of last resort (LOLR).

A perfectly reasonable thesis when applied and compared to all other central banks. There are, however, differentiating factors which negate the efficiacy of such an approach, namely:

1) Other Central banks lend to/repo from their respective single Treasuries (Federal Reserve – US Treasury; BoE – HM Treasury etc.,). With which Treasury would the ECB counterparty? All seventeen national Treasuries…completely impracticable given the scope for interest rate swap and liquidity swap arbritages:

2) Even if the ECB assumed the theorectical role of LOLR, how could the various national Treasuries service their debt without a reprofiling of the selfsame debt?

3) The elephant in the room is the EU’s inability to grow their GDP faster than the US/China/ROW owing to the EU’s cost uncompetitiveness. The only practical way of doing this is through a wholesale devaluation of the Euro toward parity with the US dollar. An ECB backstopping of all government debt, would paradoxically, inhibit such a necessary devaluation and thus stifle the growth with which the EU needs to sort itself out.
This devaluation will come about through weakened confidence in the Euro as Greece, Portugal, Ireland and Italy commence their defaults. Italy alone has €317 billion of government debt to roll over in 2012!

4) The fundamental political flaw in such a push to persuade Germany to change its stance is rooted in a somewhat jaundiced view of Germany and it’s people, I believe. I stand corrected, especially by Georg R. Baumann, but let us give the German ruling classes credit for being intelligent, rigorous yet fair.
They seem to take their laws seriously and they have as a nation an aversion toward monetary financing not just because their Grandmothers told them Weimer-stories, but because they have a governing class which is well qualified and educated enough to understand and apply basic economics and ethics to their governance.
There are undoubtly domestic interests being protected (DB, savings and landesbanken) by the current German approach, but let us not believe the myth that they are planning to takeover the EU utilities or our countries’ infrastucture!
Germany needs growth as much as the rest of Europe if only to manage their pension costs accruing due to it’s worsening demograhics. This is shared and felt by most strata in Germany and they certainly won’t be pushed around by the Anglo-Saxon financial community.

 

Exit on Euro Explodes November 20, 2011

Debt Crisis Contagion: The Euro Zone’s Deadly Domino Effect – SPIEGEL ONLINE – News – International

Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis – NYTimes.com

The Complete And Annotated Guide To The European Bank Run (Or The Final Phase Of Goldman’s World Domination Plan) | ZeroHedge

Lenders Flee Debt of European Nations and Banks – NYTimes.com

EU Paper Offers Options for Issuing Common Euro Bonds – WSJ.com

CRASH 2: WHY TOO MANY POLICIES & TOO MANY PITFALLS WILL SINK GERMANY’S EU INTEGRATIONIST STRATEGY | The Slog

The euro crisis: A sense of surrealism | The Economist

Latin showdown with Germany over ECB – Telegraph

Jim Rickards – Economics and National Security – Part 4 – YouTube

Rolls-Royce tastes lead to fiat money – time we wean ourselves off high debt | Business | The Guardian

Drugs Money Feeds International Finance

Global Narcotics Flows and the Global Financial and Economic Crisis | EastWest Institute

Russian anti-drug tsar Viktor Ivanov, a years-long close associate of Putin, spoke at Washington CSIS Friday. In a masterful presentation, he depicted the current international financial system as a cancerous bubble which is destroying the physical economy. But, he said, that bubble could not continue if not for drug money. He said he had shown his U.S. opposite numbers the proof that less than one-half of one percent of the drug dollars are ever seized — all the other 99-plus feed the bubble. He showed them that all the Afghan heroin money and all the Colombian cocaine money go to the same places, and enter the same banks at the same time.
This is no coincidence, he said. Wachovia, Bank of America, Hongshang, and other banks he named, not only participate in the laundering of the drug dollars, but actively seek ever-more drug dollars, as their other sources dry up.
It’s not just individual banks — it’s the whole financial system. It’s not enough to try to eliminate the drug supplies; we must take the fight to the financial market!
His last point was that a drastic transformation of the international financial system is required to liquidate international drug trafficking. He said that two weeks ago, the G20 had agreed to monitor financial flows. But we must go further, he concluded. “To a certain extent, we are observing a revival of the logic of the Glass-Steagall Act which the US adopted in 1933 in the midst of the Great Depression, which separated deposit-taking institutions from investment banks.”
The CSIS audience of State Department diplomats, FBI agents, Brookings and CIA analysts, Russian media, and the German Embassy was extremely focussed on his remarks — especially so towards the end.
One of the audience questions, which Ivanov said was a very good one, involved the links between drug-money and terrorism. Ivanov said that the Madrid train bombings of 2004, had been paid for with drug dollars. We require Russian-American collaboration against international narcotics, said Ivanov, first citing the use of satellite imagery to locate poppy-fields in Afghanistan. But the most important area for our intelligence collaboration is financial intelligence.

 

Germany Pushes Back Against ECB Printing Free Money For Insider Bailouts November 17, 2011

FT The Bundesbank joins the awkward squad | Gavyn Davies | Insight into macroeconomics and the financial markets from the Financial Times – FT.com

There was a time, before the existence of the euro, when the financial markets hung on every syllable uttered by the president of the Bundesbank. Not only was the German central bank the most respected institution in global finance, it was a founder member of the awkward squad, and was frequently willing to stare down politicians, no matter what the temporary costs in market turbulence. Macro traders, who were routinely dismissive of public officials throughout the world, never found that it paid to be dismissive of the Bundesbank.

Since monetary union, the Bundesbank has lost some of its lustre, which is inevitable given that its president now has only a single vote on the ECB’s 23-member governing council, the same as the head of the central bank of Cyprus. However, this week it has been just like old times, with Jens Weidmann, president of the Bundesbank, setting the entire agenda for the financial markets with his FT interview on November 13, in which he appeared to torpedo hopes that ECB bond buying would soon become open ended in order to support the new government in Italy. Mr Weidmann not only argued that such buying would be inadvisable, he went as far as to claim that an unlimited extension of the SMP to hold down bond yields would be illegal, which is another matter entirely.

A large part of his opposition to bond purchases under the Securities Market Programme (SMP) is now fairly familiar, and has been analysed in earlier blog posts. He says that the SMP cannot overcome longer term fundamentals like the path for debt and deficits. Furthermore, by reducing bond yields, the SMP can reduce the incentives on governments to undertake necessary economic reforms. The programme also involves disguised transfers of resources between member states, transfers which the members are reluctant to sanction in a more open manner.

Many present and past central bankers have a lot of sympathy for Mr Weidmann on these questions. Today, for example, Mervyn King basically supported his point of view. But these qualms, which are also undoubtedly shared by other members of the ECB governing council (including by Mr Draghi himself) have not been enough to prevent a significant increase in the pace of bond purchases since August. Since then, the ECB has extended its bond purchases by €113bn, to make a current total of €187bn. Mr Weidmann is reported to have voted against this acceleration of bond purchases, but he has not been able to block it.

He has therefore decided to step up his public opposition to any large extension of the SMP, and to emphasise a new argument, based on legality. In a recent speech, he says that the lines between fiscal and monetary policy are becoming blurred, and adds:

One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the printing press. In conjunction with central banks’ independence, the prohibition of monetary financing, which is set forth in Article 123 of the EU Treaty, is one of the most important achievements in central banking … The Eurosystem’s mandate to ensure price stability rightly involves the prohibition of any kind of monetary financing.

He is of course right about this. But the question is whether the SMP, as currently practised, is in breach of the specific wording of Article 123. This says very clearly that any ECB bond purchases direct from a member government are prohibited, but it certainly does not prohibit the purchases of government bonds in the secondary market. In fact, such purchases are clearly permitted under Protocol No. 4, Article 18, which allows the ECB to “operate in the financial markets by buying and selling outright … claims and marketable instruments”. Importantly there is no upper limit on these purchases.

Furthermore, under Protocol No 4, Article 20, “the governing council may, by a majority of two thirds of the votes cast, decide upon the use of such other operational methods of monetary control as it sees fit”, as long as this does not imperil price stability.

Mr Weidmann does not actually say that the SMP, as it has been conducted so far, violates the treaty. But in his FT interview, he does say that it would do so if it became unlimited in size (in order to set a limit on the Italian bond yield, for example), or if it were part of a “lender of last resort” facility. In either case, he argues that this would amount to monetary financing of budget deficits, and contrary to the over-arching treaty objective handed to the ECB, which is the maintenance of price stability. He therefore suggests that this would be illegal, despite the language of Articles 18 and 20 of Protocol 4, which seem to point clearly in the opposite direction.

Where does this leave the future of the SMP, which is crucial for the behaviour of the markets and possibly to the resolution of the entire debt crisis? It seems that Mr Weidmann is saying that he already opposes the current SMP, but he does not yet claim it is illegal. However, he is drawing a clear line in the sand, and is warning that open-ended bond purchases would be deemed illegal by the Bundesbank.

It is not clear how large the SMP would need to be before Mr Weidmann would deem it to be monetary financing, a threat to price stability and therefore illegal. Nor does he say what he would do about it if he did come to that view. But he is clearly already very uncomfortable about the size of the programme. And Mrs Merkel said today that the ECB “doesn’t have the possibility of solving the euro problem” under the present treaties.

I do not agree with the German reading of the treaties. But it represents a powerful roadblock to those who believe that large scale ECB bond purchases are needed to solve the crisis.