Cross-posted from Credit Writedowns
Overnight, a group of us were exchanging e-mails on the recent coordinated central bank action to provide European banks the funding being denied them by the markets. I haven’t been active on the e-mail chain, but I did find some of the commentary interesting.
I had a few comments of note I wanted to address, but here’s why I am writing this post:
“See NYT report which says clearly that the Fed did nothing to cooperate since the swap was already in place and would make no statement.”
When I read that I realised it was true. Look at the post yesterday from the BoE, “Additional US dollar liquidity-providing operations over year-end”. At the end of that press release, there is a link to the statement of every other central bank participating in the liquidity measure… except the Fed. In fact, I was looking for the Fed statement yesterday and didn’t find it. And that’s when I went to the BoE and saw they linked out to the other CB statements (sans Fed).
I think this is curious messaging because the US Treasury Secretary Timothy Geithner is over in Europe right now banging the table about the need for a Euro TARP. Cullen Roche calls it a Euro TALF. Whatever you call it, its a bailout; the original TALF sure was. Is this why the Fed went all radio silent?
I think that’s it exactly. The last post I wrote on The European Bank Bailout talks a lot about how unpopular these bailouts are; and since this is effectively a backdoor bank bailout, it makes sense that Ben Bernanke would want to keep mum, “to keep his powder dry” for QE3 as one of my friends e-mailed.
Here’s what I think is happening:
- European politicians are paralysed and are only doing enough to push off the day of reckoning. Muddling through means deepening crisis for the euro zone. Only when all other options have failed and the euro is about to break apart will the Europeans think about fiscal union and the like. I believe the sovereign debt crisis will deteriorate further for just this reason. And then we will just have to see what the politics of the individual countries in Euroland look like. If austerity brings the economy to a crawl and europopulism is well advanced, the euro will collapse. If not, the Europeans will push forward with greater integration.
- In the interim that means bailouts, not just for sovereigns but for banks as well. You remember the dust-up over ECB Target2 liquidity? Well that was the beginning of the German revolt against the ECB’s quasi-fiscal policies. These moves, while absolutely necessary to prevent a Lehman-style crisis because of Euro politicians’ dithering, are politically charged. We now have seen two major ECB defections from Axel Weber and Juergen Stark. I think that there is even more discord behind the scenes.
- Even so, the ECB has now been forced because of the wholesale market bank run now ongoing in Europe to go further. In order to deflect criticism, the ECB’s bailout of the Euro banks has been coordinated with four other central banks.
- But the Fed’s lack of commentary demonstrates that the other banks are just a cover. First, the Fed feels politically constrained due to its own machinations in the past and the likelihood it will engage in a muscular easing policy if and when the US economy double dips. It does not want to come under attack for this Euro bank activity. Second, dollar swap lines are already in place and have been extended. This policy didn’t have to be announced this way. It was only to calm markets and buy time.
- Meanwhile Tim Geithner thinks the Euro-TALF bazooka is the right way to buy significantly more time. He is over urging the Europeans to take out the bazooka by leveraging up the EFSF ten to one in order to buy the Europeans $2 trillion euros of fire power. Now, that’s a bazooka.
If Stark and Weber resigned over this, what is the likelihood that the ECB is going to go for a Euro-bazooka $2 trillion TALF? I say it’s not going to happen. And that means, European politicians need to get that rabbit out of the hat soon because things will most certainly continue to deteriorate.
Comments and insights appreciated