We no longer check to see whether Telegraph.co.uk displays properly in Internet Explorer version 6 or earlier.
To see our content at its best we recommend upgrading if you wish to continue using IE or using another browser such as Firefox, Safari or Google Chrome.
Accessibility links
Wednesday 21 December 2011
| Subscribe
Telegraph.co.uk Home News Sport Finance Comment Blogs Culture Travel Lifestyle Fashion Tech Dating Offers Jobs Companies Comment Personal Finance Economics Markets Your Business Olympics Business Business Club Money Deals Home» Finance» Financial Crisis Don't ask the ECB to intervene Is it possible that the European Central Bank (ECB) doesn't want to intervene to end the debt crisis is because, whisper it quietly - it can’t afford to? The ECB has made supporting Europe's beleaguered banks one of its core policies - it's opened its doors and lowered its collateral requirements.2:30PM GMT 20 Dec 2011
Comments
Every day political and economic leaders demand that the ECB is made the lender of last resort and embarks on a policy of quantitative easing, like the Bank of England or America’s Federal Reserve.
Timothy Geithner, David Cameron and Nicolas Sarkozy are advocates. Mariano Rajoy in Madrid was the latest. Yesterday the Spain’s new prime minister used his inaurgural speech to commit his country to austerity measures that, he said, was a “thankless task, like that endured by parents who struggle to feed a family of four with enough money for only two”. But he also begged for the ECB to become the lender of last resort.
But Germany’s refusal is absolute. And so is the ECB’s. Yesterday Mario Draghi said: “The treaty forbids monetary financing,” he said. “We want to act within treaty. Losing credibility for the central bank is not going to do any good to market confidence or euro design.”
Is Germany really that heartless? In part the answer is yes: some economists reckon there is nothing - and no country - Merkel wouldn’t sacrifice on the altar of 2pc inflation in Germany. But Open Europe reckons there’s a big financial hurdle too: the ECB has already intervened massively - through its bond buying programme and support for banks - and is now dangerously exposed to the sinner states already.
The think-tank’s report says: “Through its government bond buying and liquidity provision to banks, the ECB’s exposure to the PIIGS has now reached €705bn, up from €444bn in early summer. This is an increase of over 50pc in only six months and shows how, contrary to popular belief, the ECB is already intervening quite heavily in the markets.”
Related ArticlesIMF chief warns world economy at 'dangerous juncture'
20 Dec 2011ECB accuses eurozone leaders of creating a 'cycle of risk'
19 Dec 2011ECB helps Spanish borrowing costs halve
20 Dec 2011France has 'no doubt' UK will help fund IMF euro bailout
20 Dec 2011EU vital to 3m British jobs
19 Dec 2011Dexia to sell Luxembourg arm for €730m
20 Dec 2011The problem is with the banks as well as the sinner states. The ECB has made supporting Europe’s beleaguered banks one of its core policies. It’s opened its doors and lowered its collateral requirements.
In practice, banks are able to both borrow and dump low quality collateral in one go. Open Europe says “though not all of these assets are bad or ‘toxic’, they are extremely difficult to value.”
Sound familiar? As in the previous banking crisis, this is all well and good - as long as this is a liquidity not a solvency problem.
Politicians can't be sure, yet Sarkozy and Christian Noyer, the Governor of the Bank of France, have argued the banks should stock up on sovereign debt. Yesterday Draghi said the same.
If the sovereign debt plunges, the banks will need more support; and the ECB will take on the risk. Open Europe said encouraging the banks to “load up on risky sovereign debt just to keep the eurozone ticking over in the short-term” could amount to a “spectacular own goal” by the ECB.
Of course central banks can in theory expand their balance sheets as much as they like. In practice, like everyone else, they have to maintain the confidence of the markets.
And at this rate, as Open Europe says, “it remains unclear how the ECB would cover losses in the event of a sovereign default.”
The ECB can only absorb so many losses before it has to either ask for more capital from member states or print more money - both of which would be politically impossible and damaging to the ECB’s standing.
Faced with these options, Draghi’s opposition for either a massive bond-buying programme or direct help for a eurozone state, will necessarily remain as staunch as Germany’s.
(function(d, s, id) { var js, fjs = d.getElementsByTagName(s)[0]; if (d.getElementById(id)) {return;} js = d.createElement(s); js.id = id; js.src = "//connect.facebook.net/en_GB/all.js#xfbml=1&appId=120118784736295"; fjs.parentNode.insertBefore(js, fjs); }(document, 'script', 'facebook-jssdk')); .at15t_email {display:none !important;} ul li.email span.at300bs {display:none !important;} // Preload images var closeOnHover = new Image(); closeOnHover.src = "/template/ver1-0/i/addthis_menu_close_active.gif"; var menuTop = new Image(); menuTop.src = "/template/ver1-0/i/addthis_menu_top.png"; {parsetags: 'explicit'} X Share & bookmark Delicious Facebook Google Messenger Reddit Twitter Digg Fark LinkedIn Google Buzz StumbleUpon Y! Buzz What are these? Share: Share Tweet http://www.telegraph.co.uk/finance/financialcrisis/8968105/Dont-ask-the-ECB-to-intervene.html Telegraph Financial Crisis Finance » Comment » EU » Louise Armitstead » Read Full Article »