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.
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.
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.
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.
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.
“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.”
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?”
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.
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.
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.