ECB into the breach?

Various Eurosceptics are piping up this morning, and no wonder.

Unfortunately some of the interesting stuff is behind the FT’s magnificently unstable subscription firewall, which, in an attack of paranoia, or megalomania, has decided today, as it occasionally does, to deny access to everything, even the free bits, subscriber or not. It is like something off the DiscWorld. Thank goodness it can only wall off the FT, not the entire internet, but I bet it wants to.

I might post again if the FT techies manage to tame it, but for the moment it is going to have to be a diet of Ambrose and Johnson&Boone, amplifying my post earlier today.

The money quote from Johnson and Boone is this one, on the little problem with promising a bailout plan for 2013 when the bailout needs to happen in 2010:

“Given the vulnerability of so many eurozone countries, it appears that Merkel does not understand the immediate implications of her plan. The Germans and other Europeans insist that they will provide new official financing to insolvent countries, thus keeping current bondholders whole, while simultaneously creating a new regime after 2013 under which all this debt could be easily restructured. But, as European Central Bank President Jean-Claude Trichet likes to point out, market participants are good at thinking backwards: if they can see where a Ponzi-type scheme ends, everything unravels.”


Ambrose has some more numbers that show why Portugal really, really shouldn’t be attracting attention to itself right now (see my earlier post today):

Portugal is in worse shape than Ireland. Total debt is 330pc of GDP. The current account deficit is near 12pc of GDP (while Ireland is moving into surplus). Portuguese banks rely on foreign wholesale funding to cover 40pc of assets.

The country has been trapped in perma-slump with an over-valued currency for almost a decade. Successive waves of austerity have failed to make a lasting dent on the fiscal deficit, yet have been enough to sap the authority of the ruling socialists and revive the far-Left.

Not sure how Ambrose gets to 330% of GDP as the debt number (the usual one is ~100%), but it’s the 40% wholesale foreign funding number that caught my eye. For comparison, it was a ~30% wholesale funding ratio that turned our Northern Rock from an apparently overcapitalized bank, in July 2007, to a run victim and basket case three months later, once the CP markets seized up properly. With HBOS, a much bigger mortgage bank, a 20% funding ratio merely meant that the liquidity problem took longer to turn up, and when it did, it was huge. Indeed, the problem of rolling over that debt still haunts us. So – 40% reliance on flighty foreign wholesale funding? That could turn into a credit crunch in the twinkling of an eye, even if it has been tolerated by markets for a decade.

It is hard to see how Portugal could avoid being sucked into the vortex alongside Ireland. Europe and the IMF would then face a cumulative bail-out bill of €200bn or so. That stretches the EFSF to its credible limits.

One sees that the Euro interest rate that was far too low for Ireland, and sparked the property bubble there, has been far too high for Portugal, providing a decade-long example of failed austerity policies that no-one’s paid much attention to. Oh well, at least the Euro interest rate has been just right for Germany and France…

As usual with AEP it just gets better from there..Spain:

The focus would shift instantly to Spain, where economic growth stalled to zero in the third quarter, car sales fell 38pc in October, a 5pc cut in public wages has yet to bite, and roughly 1m unsold homes are still hanging over the property market. The problem is not the Spanish state as such: the Achilles Heel is corporate debt of 137pc of GDP, and the sums owed to foreign creditors that must be rolled over each quarter.


It is far from clear what would happen if Italy was forced to provide its share of a triple bail-out for Ireland, Portugal and Spain. Italy’s public debt is already near danger point at 115pc of GDP. It is also the third-largest debt in the world after that of Japan and the US. French banks alone have $476bn of exposure to Italian debt (BIS data).

While Italy has kept a tight rein on spending, it is not in good health. Growth has stalled; industrial output fell 2.1pc in September; and the Berlusconi government is disintegrating. Four ministers are expected to resign on Monday.

That’s enough more than enough apocalypse, methinks. As we just saw with Ireland, sometimes doom gets delayed. Point is,

It is clear by now that IMF-style austerity and debt-deflation is not a workable policy for the high-debt states of peripheral Europe, since it cannot be offset by the IMF cure of devaluation. The collapse of tax revenues has caused fiscal deficits to remain stubbornly high. The real debt burden has risen further.

So where to turn? The ECB, Ambrose thinks:

The ECB is the last line of defence. It can halt the immediate Irish crisis whenever it wishes by buying Irish bonds.

Think it’s done that already…to the tune of Eur130Bn..and for my part, I think that it actually has halted the Irish crisis; pending the next bout of Irish internal politics, and assisted by the flip on bond haircuts broadcast by Seoul.

Yet instead of pulling out all the stops to save monetary union, the bank is winding down its emergency operations and draining liquidity. It is repeating the policy error it made by raising rates into the teeth of the crisis in July 2008.

…no doubt all sorts of European politicians are keen to engage the ECB in discussions about its liquidity policy…

Yes, the ECB is already propping up Ireland and Club Med by unlimited lending to local banks that then rotate into their own government debt in an internal “carry trade”. And yes, the ECB is understandably wary of crossing the fateful line from monetary to fiscal policy by funding treasury debt.

The ECB is already at least halfway through a pretty major “repurposing”, as Rebel Economist observed. The continued debt stress might just keep enough pressure on to continue that process.

More from me on bailouts, Euroinstituions, etc if the FT comes out of its sulk (will be checking in a moment), and if I get time.

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  1. Hubert

    “Yes, the ECB is already propping up Ireland and Club Med by unlimited lending to local banks that then rotate into their own government debt in an internal “carry trade”. And yes, the ECB is understandably wary of crossing the fateful line from monetary to fiscal policy by funding treasury debt.”
    Dear Ambrose, no practical difference here for the ECB. If the ECB pulls its funding, the banks go down together with their states. So the ECB carries the all Risk anyway – so it shouldat least earn the spread too.
    Yes, they may be able to lay off the funding to the EFSF but in reality, that is left pocket-right pocket in Euroland, isn´t it ?
    2013 is a good date for Merkel, because probability is she will be gone by then.

  2. i on the ball patriot

    The gang rape of Ireland,
    Its a brazen affair,
    The other ladies tremble,
    As Irelands’ stripped bare,

    They must remain silent,
    Vexed and perplexed,
    In forced complicity,
    For fear they’ll be next,

    So they watch in horror,
    As rich bankers en masse,
    Force the huge cock of debt,
    Firmly up her poor ass,

    There is a solution,
    Its unified calls,
    To kill all the bankers,
    And cut off their balls!

    Deception is the strongest political force on the planet.

  3. libhomo

    The problems could easily be resolved by nationalizing all the world’s banks. If the banksters continue their greedy, extortionist games, nationalism will become the only alternative.

    1. lambert strether

      Why don’t we turn the banks into regulated public utilities? Then we can put our mortgages, and car loans, and student loans, and other boring stuff in the public bank.

      And when the rich want to play the ponies with other people’s money, they can do it with their own damn money. And when they lose it all, as they always do, they’ll be on the hook for it, and not us.

  4. lambert strether

    Re the FT:

    I have it on not especially reliable authority that the same firm which designed the Jaguar’s electrical system also designed the FT’s firewall.

    So, I’m guessing it’s raining in London!

    1. Jim Haygood

      That would be what vintage Triumph, MG and Morgan owners call the Prince of Darkness — Lucas electrics!

      Comforting that some timeless British traditions never change!

  5. voislav

    Regarding Portugal debt numbers, I believe he is looking at total debt owed to foreign creditors. Last number I’ve seen had is at 230% GDP or €3600bn euro in 2009. Ambrose seems to be pegging it at €500bn, hence the figure of the €200bn for the bailout (40% of €500bn).

    1. Richard Smith

      Ulp, that means the private savings I though they had don’t really exist.
      That EUR200Bn bailout figure was for Ireland and Portugal, ie the EUR500Bn debt total is for Ireland and Portugal. I think your original EUR360Bn Portugal numbers must be what he’s working off.

  6. jahwe

    No way. Germany / France / UK won’t allow Ireland to fall, not because they wouldn’t want to, but because they can’t. The banks in those countries are the biggest external holders of Irish debt / Irish bank debt. Would be interesting to see how many banks still balance those debt at face value (wink to the Germann Hypothenkenbanken!).

    1. Liminal Hack

      As a commenter on the AEP article points out, the EU technocrats won’t allow euro area sov defaults because if they do that’ll be the end of the euro and they’ll all be out of jobs.

      Serious protests against austerity in germany are afoot (by those produtive (aka cheap) german workers so beloved of telegraph wingnuts, shock horror) and the EU moneymen only need to wait long enough for merkel to have serious domestic unrest in the face of her and Axels 19th century economy policy to get signoff to open the sluice gates.

      While no-one except me will admit to wanting to see printy printy in an ideal world, investors like the idea of random sovereign mayhem even less than monetisation. Currencies that try and retreat from the nominal nature of government debt at this time and in this day and age are going to be keelhauled by the markets.

  7. charles

    Imho, it looks like Angela has put herself again in a gridlock
    , Korean fatigue. According to I.Stelzer from his weekly column on the Euroland in the WSJ, the R.B.S just
    released an estimate that the banks of the Eurozone counties,outside the troubled countries of the periphery, hold over two trillion euros of sovereign debt of those countries.
    So, and only Mr Trichet knows that, it looks like Europe is toast and that the ECB is thus insolvent and will have to be recapitalized..Your quote of ECB buying Irish bonds cannot be accurate, for, if the BCE does publish on a weekly basis the amount of its purchases of sovereign bonds, it does not disclose the content of the basket..

    1. Richard Smith Post author

      Think the source may be the Irish Central Bank, not the ECB. Bloomberg, which first published the story, doesn’t provide a link.

      1. charles

        Market watch provides the figures

        Data released Friday showed borrowing by Irish institutions from the European Central Bank rose to 130 billion euros ($178 billion) as of Oct. 29, up from €121.1 billion at the end of September. That makes Irish banks the top borrowers from the ECB and underscores the difficulty the nation’s lenders have in securing wholesale funding.

        LONDON (MarketWatch) — The European Central Bank last week stepped up its purchases of euro-zone government bonds, data showed Monday. The Frankfurt-based ECB settled 1.073 billion euros ($1.46 billion) of bond purchases, up from 711 million euros the previous week. The ECB doesn’t offer a breakdown of the bonds purchased under the program, but analysts said a rise was expected in light of turmoil in Irish and other peripheral euro-zone debt markets last week. The bond-buying program was implemented in the spring at the height of the euro-zone debt crisis to smooth the functioning of distressed credit markets.

  8. Stephen zz

    I occasionally have been FT firewall challenged. I have found a different browser responds. For me shifing from IE to Firefox did the trick.

  9. Don Benson

    Regarding Spain, last week on UK Bloomberg TV there was an interview with Charles Dumas, an excellent economist from Lonbard Street, who was very upset with Spain’s recently announced GDP figures. He said they were getting to be as bad as Greece in fudging their figures, and felt it was clear that they should have accurately reported a sharp drop in GDP, rather than reporting a flat number.

  10. Patrick Wacker

    Could someone post the link(s) to “some of the interesting stuff” which Yves says is “behind the FT’s magnificently unstable subscription firewall”. Thanks.

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