Yves here. Economists argue that central banks needed to be independent in order to insulate them from political pressure in setting interest rates. There’s no justification for a central bank to be outside the law. Indeed, there was a huge hue and cry in the US when the Treasury tried to put itself in a position of being unable to be held to account, even with respect to criminal acts, in its first draft of the TARP legislation (BTW our takedown is a classic). It’s thus astonishing to see that the ECB has achieved that on a much broader basis.
By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street
It all began with an early morning police raid. On July 6, Slovenian Police, acting on an insider tip, stormed the headquarters of the country’s central bank, the Bank of Slovenia, and seized information stored on the bank’s internal network. It also raided the headquarters of the major state-owned bank Nova Ljubljanksa and the local offices of international accountancy firms (and prolific enablers of corporate misbehavior), Ernst & Young and Deloitte.
The police were investigating allegations that some “legal entities” had abused their office in valuing equity at Nova Ljubljanksa during its bailout by the state in 2013. €257 million is alleged to have been misappropriated, during the €3.2 billion bailout of the banks.
The action provoked a furious backlash from ECB chairman Mario Draghi, who wrote the following in a strongly worded letter:
The ECB deplores that there was no attempt to find a solution reconciling the conduct of the pre-criminal investigations with the ECB’s privilege on inviolability of its archives…
The ECB also regrets that the actions of the Slovenian Police risk putting into question the fulfilment of the Bank of Slovenia’s tasks as a member of the Eurosystem, as well as that of its governor in his personal capacity as a member of the Governing Council of the ECB.
Both Slovenia’s central bank and Finance Minister Dusan Mramor, who unexpectedly resigned on July 13, sided with Draghi, arguing that the probe represented an attack on the central bank’s institutional independence. They both called on Prosecutor General Zvonko Fiser to conclude his probe into the €3.2 billion recapitalization of state-owned banks as swiftly as possible.
But not everyone agrees. According to the police, legal entities, including the Bank of Slovenia and its staff “are not protected from investigations” in pretrial proceedings. Likewise, a Slovenian association of small shareholders, representing owners of around €600 million of subordinated bonds that were bailed in as part of Slovenia’s bailout, accused the ECB president of interfering “with the independence of Slovenian authorities, prosecution, and courts.”
In part they are right: the ECB is directly interfering in the actions of Slovenian authorities, prosecution, and courts. But where they are wrong is in their belief that these institutions enjoy any kind of procedural independence when it comes to investigating the actions of Slovenia’s central bank in its bailout of the financial system. Such powers were signed away a long time ago by Slovenia’s government — and the governments of all other Eurozone member states.
The ECB and all of its affiliated national central banks are, by law, above the law of national jurisdictions and answerable only to the European Court of Justice, provided they are fulfilling the functions and responsibilities assigned to them by EU law. This is particularly true in relation to bailouts of Europe’s financial institutions, an issue that is once again on the front pages, as the financial sector of Italy readies itself for a bailout of potentially biblical proportions.
No European institution is as immune from national law as the Luxembourg-based European Stability Mechanism (ESM), which was founded on September 27, 2012, as a permanent facility within the ECB to provide bailouts to countries that are in distress. It currently has an authorized capital limit of €700 billion, though that can be expanded at any time by the board of governors, and individual Eurozone member states are “irrevocably and unconditionally” required to cough up the funds.
The institution has already provided €136.3 billion in bailout funds to three Eurozone members — Cyprus (€9bn), Greece, (€86bn) and Spain (€41.3bn) — but that amount is almost certain to increase in the coming months amidst calls from the ECB, among others, for the creation of a European TARP fund to mop up the non-performing loans clogging up the banking systems in Italy and Greece.
In one fell swoop, tens of billions of newly created digital euros will flow from Frankfurt and Luxembourg to the central banks of Italy and Greece, and from there onto the balance sheets of distressed banks throughout the two nations. With such huge sums of money flowing between institutions of questionable repute and under conditions of virtual secrecy, the potential for fraud or outright theft on either or both sides of the transactions is huge, especially given blanket immunity.
Under Article 32 of the consolidated ESM Treaty:
“The ESM, its property, funding and assets, wherever located and by whomsoever held, shall enjoy immunity from every form of judicial process except to the extent that the ESM expressly waives its immunity…”
To hammer the point home, Article 32 further states that:
“The property, funding and assets of the ESM shall, wherever located and by whomsoever held, be immune from search, requisition, confiscation, expropriation or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action.”
The same article also points out that the “archives of the ESM and all documents belonging to the ESM or held by it, shall be inviolable.”
It’s not just the ESM’s property, funding and assets that are inviolable; so, too, are its employees. To wit, from Article 35:
In the interest of the ESM, the Chairperson of the Board of Governors, Governors, alternate Governors, Directors, alternate Directors, as well as the Managing Director and other staff members shall be immune from legal proceedings with respect to acts performed by them in their official capacity and shall enjoy inviolability in respect of their official papers and documents.
The above clauses provide the ESM and its employees with not just complete immunity from national law, but total impunity. It’s a recipe for rampant abuse of power and white-collar criminality. In the case of the bailout of Slovenia, one of the Eurozone’s smallest economies, €257 million is alleged to have been misappropriated. That’s almost 10% of the total funds released.
Imagine how much money could be made to disappear in a bailout of Italy’s banking system!
The ECB’s clash with Slovenian authorities raises serious questions about the accumulative — and ongoing — power grab of an institution that is now arguably Europe’s most powerful.
It was a perfect gift to a desperate market. All that was needed was a gentle hint that Italy’s troubled banks and their bondholders might not be hung out to dry. Read… Look Who’s Frantically Demanding that Taxpayers Stop Italy’s Bank Meltdown