Looks like the drama could be about over, with the ECB now deciding to support the entire banking system.

The ECB guarantees bank liquidity via lending to any member bank with qualifying collateral. The list of qualifying collateral is kept sufficiently inclusive and haircuts sufficiently low to ensure liquidity.

With national govt debt on the list of qualifying collateral, this allows the banking system to support national govt funding needs.

And it all comes at a time where euro zone deficit spending is sufficient to support flat to modest growth. And at a time when the politics are unlikely to push for additional material proactive austerity measures.

With modest growth and relative stability will come proclamations along the lines of ‘the austerity worked’, however, without the austerity it all would have ‘worked’ just as well, but from a starting point of a lower output gap.

66 Responses

  1. Warren,

    Looks like this liquidity for the banks takes different forms.

    As far as I understand until now we saw the ELA used for GR banks (and I think previously for Irish banks). In that construction the national Central bank holds the risk of lending to the banks.

    Now in Spain the Spanish govt buys shares in Bankia and pays with SP govt bonds. Bankia then gives these bonds to the ecb as collateral to obtain cash. SP govt and Bankia avoid the costs of the markets. In this construction the ecb holds the risk of lending to the bank.
    SP 10yrs today over 6.46% and spread with Bund around 509bps.

    How do you look at these 2 ways?
    Spain can still do that, but soon yields will not allow them anymore?

      1. @Winslow R.,

        No law without enforcement. Point out the man that will say ‘no’, allow the Bank of Spain to go insolvent and bring down the Euro payment system.

        Rajoy should continue to push this line and let the Germans know that he will press the button unless they come to the table on an alternative.

        Spain is not a tiddler like Ireland or Greece. It doesn’t need to roll over and have its tummy tickled.

      2. for one thing, they are still funding everything day to day, which is what matters.
        my guess is they’ll come up with something else, debate it, maybe shoot it down, all now involving ECB support,
        and, meanwhile, continue to fund it all.

        the real question is whether deficits are now high enough to get some growth going, albeit from the current depressed levels.

        in the UK it seems to be happening some. and the greek deficit is plenty high for some growth if they don’t add to the austerity demands

      3. @Winslow R., All signals I get point at further contraction.
        Today Barosso mentioned that the deficits are better, read ‘less’ than expected. I am afraid we know enough then.

      4. @Winslow R., How can a policy act be “in danger of” contravening some other policy? Is there a time limit on whether the violation will or won’t actually occur?

        I’ve heard of flexible policy, but this sounds more like a Dilbert cartoon.

      5. @Mosler R.,

        > the greek deficit is plenty high for some growth

        Even a terminally ill patient can technically keep growing right up to the point of death.

        Parts can grow, and even add up to net growth, but those are static, not dynamic metrics of whether the aggregate will survive. Does anyone really have an accurate model of what will/won’t sustain Greece as a unified aggregate?

  2. You’re forgetting European politics. Did you read the interview with Jens Weidmann in Le Monde recently? I’m not convinced Germany will allow the ECB to “support the entire banking system”. In fact, Weidmann said precisely the opposite in the interview: he ruled out both Eurobonds and more LTRO’s, and affirmed that price stability is the only goal of the ECB. He said just as the Fed doesn’t (yet?) buy California’s bonds, the ECB should not buy bonds from individual nations. He sounded really quite annoyed by the whole thing. My main concern now is not Greece leaving the EZ, but Germany.


  3. “With modest growth and relative stability will come proclamations along the lines of ‘the austerity worked’”

    Oh yeah. You KNOW thats coming. One thing about these neoliberals is that they are able “find” a metric that will prove their theory under just about any condition. Thats the beauty of neoliberalism it can be shown to be responsible for everything good and all the bad can be explained away as “just not enough of (insert favorite neo liberal metric).”

    Its such a comprehensive theory Warren, I cant understand why you dont seem to embrace it ; )

    1. @Greg,

      “One thing about these neoliberals is that they are able “find” a metric that will prove their theory under just about any condition.”

      Much as I agree, I don’t think anyone has a monopoly on this.

      1. @Art Patten, That you can COUNT on Art! The simple act of breeding required diversity also breeds a constant fraction of Control Frauds to weed out of the garden. 🙂
        A glimpse of MMT in the wrong hands can produce some real Laffers, and worse.

  4. You say things are smooth sailing Warren, but real people are taking real actions to the contrary as shown below. This could be a win for TEAM USA though, since our american women are too good to have babies anymore, we could do Ellis Island 2.0 and bring all these masses to our shores and give those mexicans a run for thier (race to the bottom) dollar! LOL! I hope you and Erickson and others with DC ties will tell them political boyz to make good policy to bring all these euro immigrants over, it may be the last good chance we have to get population levels to compete with china and india.


    Theresa May says “work is ongoing” to restrict European immigration in the event of a financial collapse.

    People from throughout the EU, with the exception of new member countries such as Romania and Bulgaria, are able to work anywhere in the single market.

    However, there are growing concerns that if Greece was forced to leave the euro, it would effectively go bankrupt and millions could lose their jobs and consider looking for work abroad.

    The crisis could spread quickly to other vulnerable countries such as Spain, Ireland and Portugal, although Britain is regarded as a safe haven because it is outside the single currency.

    Details of the contingency plan emerged as the euro crisis deepened further yesterday.

    1. @Save America, Just think of the political good will you could generate for your next campaign if you were seen as one of the people spearheading the effort to get all these new immigrants into the USA, they would vote you in fo sho! Your senate seat would be all but gauranteed!

    2. @Save America,

      Im sure US can get immigrants so it can “rival populations of India and China” if it were to open it’s borders more.

      There is no shortage of peoples in this planet. 7 billion and counting.

      1. @PZ, PZ, we are going in reverse in USA, my friends who were tired of american woman used to have the option of going planetwide and marrying as many wives as they wanted (sometimes at the same time – like mormons LOL!), but now they tell me the state department is limiting thier foreign wives to just 2! Can you believe that? I was talking to Sam Sloan, an old chess guy who married lotsa muslim women from the middle east, he was not happy with this, and then I talked to my other chess friend Judit Polgar, she was from russia. I have many friends at Nasa who married all those russian brides, etc etc

        So TEAM USA obviously has anti-immigrant policies, now you see UK is working on contigency plans on anti-immigration from the link above as well, unsettling trend I would think, really restricting the freedoms of human beings to do what they want with their lives and spend it with whom they choose. Colin says we should all be in agreement that we “want” government and for it to serve us to the greater good of all, but when the government gets to pick and choose who you can and can’t marry, maybe you get tired of that government?

    3. @Save America, The whole notion that people take off for distant climes in response to near starvation at home makes no sense. People near to starving don’t have enough energy to go anywhere and certainly not across deserts and mountain ranges where they have no idea what they’ll find.
      However, it makes a good story to exact support from people who fear an invasion of strange folk and welcome any opportunity to keep and control people where they want them. People on the move, especially when they use their own two feet, are a real nuisance to control freaks.
      Here in the U.S. we’re routinely distracted by limits on speech when what’s really under threat is the right to perambulate.

      1. @Monica Smith, “The whole notion that people take off for distant climes in response to near starvation at home makes no sense.”

        I been watching history channel roman stuff all weekend, many FREE citizens willingly decided to become SLAVES to others to beat the government sillyness of thier day, they saw no other “out”

        I watched a special on charlemagne around 800 AD I think, all these vikings were starving to death and came to what was possibly going to be the renaissance (600 years early) and ransack all the towns and keep the dark ages going a long time.

        U aint kidding about people on the move, I travel a lot, and the banking and postal nightmare of working with everyone I need to work with make it extremely challenging, but I won’t let them lock me down to one piece of land. I had a colonel friend who also loves to travel in the military that gets free air travel but says the scheduling nightmares have become so cumbersome, he sits at home now and watches the travel channel! LOL!

    4. @Save America,

      “it may be the last good chance we have to get population levels to compete with china and india.”

      And what is this competition between the US and China/India to which you refer?

      1. @ESM, You must not read Warren’s Blog, imports are a benefit, and exports are a cost (unless you are talking american woman! – LOL! Just kidding!)

        I want to import lotsa foreign women, competition is good for the consumers (in this case me and my peers). And forces the producers (american woman) to compete more heavily. My god at the monopoly american woman got though, the fascist state sponsored laws that keep her POWER too elevated, my friends have been told by the state department they can have lotsa US wives, but can’t go overseas anymore and get foreign ones! FASCISTS! 😉

        I hear all these economists talking about GROWTH, and how japan and others are facing a demographic crisis because they didn’t keep thier women making babies. But china and india have 1 billion babies, and we got 300 million, so if we want to grow, we need some of those beneficial imports (of people) eh?

  5. How is this a “solution” to the real problem? Are you saying that there will be unlimited ECB lending to banks, which will buy unlimited Greek bonds, enough to drive the Greek bond interest rate down to where Greece can afford the debt service costs? Still, even at a constant 1/4% interest, if the principal continues to rise faster than GDP, won’t debt service costs eventually become unaffordable again?

    Is there also a guarantee that the banks will buy the Greek bonds? Do the “bond vigilantes” have anything to say about it?

      1. @WARREN MOSLER,

        This is as good an opportunity as any, I guess, to say something I’ve been thinking about for a while.

        I like your style on the radio and TV interviews. You explain clearly and completely, in a way that is understandable to the average listener.

        “Short term funding” as an answer to my questions (or only one of them? which one?) is not helpful to me. Your cryptic and inscrutable style in answering questions on this blog is completely the opposite of your style on the radio. I guess you are more pressed for time here, but maybe something in between?

        I’ll give you a multiple choice:

        A. This “solution” is only a short-term funding, stopgap measure and not a real solution to the real problem.

        B. Greece can issue only short-term debt from now on, and so this answer will work indefinitely, where long-term debt would bring up solvency issues in the future.

        C. The banks will be very willing to buy short-term Greek debt in unlimited quantities forever, don’t worry about that. Greece can issue and roll over short-term debt even if the interest payments exceed the entire GDP of the country. They’ll just pay the interest with more short-term bonds.

        D. The bond vigilantes can have no effect on short-term debt, only on longer-term bonds.

        E. Just explain more fully, and make it clear to which question(s) you are responding.

        Thanks, and thanks for all your writings. I hope you run for office again and win (I don’t mean that as a curse:)

  6. Warren claims “the drama could be about over”. The ECB offering loads of money in exchange for periphery debt will obviously solve the problem for a while. But it does not deal with the fact that the periphery is uncompetitive compared to the core.

    If you are uncompetitive and running up debts, you can print bits of paper promising to pay those debts. If some mug takes the bits of paper at face value, that’s great for the debtor. But I doubt the main shareholder in the ECB, i.e. Germany, will be fooled for long. I doubt they’re even fooled right now.

      1. @Neil Wilson,
        There is the option to take Spanish bonds off the list of eligible collateral if they are taking it too far. But with Spains debt/gdp ratio (.7-ish) being better than Germanys (.8ish) that option is not on the table for the time being.

      2. @Jacob Goense,

        Not at the Spanish Central Bank there isn’t – it is a nationalised institution. Ultimately the government can direct it if required.

        If the other ECB members don’t like that, then they have to throw Spain out of the Euro.

        The ECB is a joint venture of the National Central Banks.

      3. @Jacob Goense,
        Indeed, removing the Spanish bonds from the list of eligible assets sends the banks back to their local ELA window.

        That’s the way Germany can prevent having to stump up I’m saying.

        Throwing out Spain from the Eurosystem doesn’t do that as I don’t see the Spanish central bank ever settling its current TARGET2 balance. This will hit the ECB P&L and Germany is a major shareholder.

      4. @Jacob Goense,

        Gha, or as the FT article suggests, not even placing such a new issue on the eligible assets list in the first place. Makes sense in a way, qualifying a pile of paper exchanged for stock in a failing bank as marketable securities is a stretch.

      5. @Neil Wilson,
        The options are limited.

        1. Quit the Euro, or “throw the periphery out” to use your phrase. 2. Carry on imposing austerity on the periphery. 3. Be generous towards the periphery. That is, buy up periphery bonds of questionable worth. But there isn’t anything forcing Germans to do this. That is, I doubt the “hump of money” in Germany absolutely has to be recycled to the periphery. They can do nothing with the money – to a significant extent what they currently are doing in that Euro banks are just depositing much of their spare cash with the ECB. Or they can lend / invest elsewhere in the world.

      6. @Ralph Musgrave,

        It’s all going to boil down to whether the Germans are more frightened than the Spanish (et al) about the Euro collapsing.

        And that then becomes raw politics rather than anything to do with economics.

      7. @Ralph Musgrave,

        Neil Wilson said:
        > It’s all going to boil down to whether the Germans are
        > more frightened than the Spanish (et al) about
        > the Euro collapsing.

        It’s a matter of distributed discernment.
        Whether their policy channels (staff & electorate feedback) even recognize their options, let alone explore them.

    1. @Ralph Musgrave, “uncompetitive” What does that word even mean? In U.S. parlance competitive seems to have evolved from striving for a common goal (excellence) to being able to knock the other guys out of the field, ala Tonya Harding. So, does “uncompetitive” mean an entity lacks the killer instinct? If so, is that good or bad?

      1. @Monica Smith,

        Uncompetitive means they cost more for the same thing, or give less for the same price.

        Assuming that was a real question. It’s just business, not Roman Gladiators.

  7. from Citibank European Credit Weekly
    “As we see it, parts of the market are getting far too optimistic on the prospect of an effective pan-European deposit guarantee scheme. Consider that there are €4.5tn of deposits in Italy, Spain, Portugal and Ireland alone. While the probability of EMU breakup may be low, the contingent liability this would impose on Germany and a few other core countries is enormous. Policymakers might agree on a token DGS, but one that jointly and severally guarantees deposits in euros would be very, very difficult to sell in national parliaments, in our opinion.”

  8. That a DGS is even being considered suggests that some people are beginning to realize the power of the ECB to stabilize the Eurozone w/o risk of euro hyperinflation. Wouldn’t that be kind of a big educational step?

  9. Very sad news. The typical liberal response that all can be solved by printing money. If it was only that easy…The insolvent banks need to go under and be replaced by healthier ones, otherwise we are in for more lost decades. Failure is a crucial aspect of capitalism, bailouts are not.

      1. @WARREN MOSLER,

        right — wiping out shareholders is beside the point now. let’s say a bank fails, all shareholders are zeroed but debt structure is left intact. some losses are realized. bank’s balance sheet is then sold intact or piecemeal to highest bidder(s).

        none of this has any material effect on national accounts. spain still has to fund in euros, spain’s banking sector remains imperiled without a proper central bank to control interest rates. switching around who owns what bank is meaningless in relation to the problem.

      2. @gaius marius,

        > without a proper central bank to control interest rates

        That’s an interesting point. Does the SGP prevent any member country from setting interest rates by decree, and even having their own CB buy all gov bonds? There’s a long history of that occurring, in many countries.

        Does the SGP even stipulate that supposedly still sovereign nations must sell gov bonds? Could Spain immediately have it’s CB “buy” gov bonds at zero interest rate?

        Are there any Euro PMs with the courage & loyalty to actually explore national options?

  10. Warren,

    On several occasions we have heard that Monti said he could convince Germany to approve eurobonds.
    Until now we have heard that Germany complains against eurobonds because they fear their interest costs will go up to some average between their current level and the level that other member states pay.
    The other point is that Germany fears there will be no incentive for any reform if eurobonds will be introduced.

    After your last visit to Italy do you have any indication that Monti would be able to explain to Germany that the ecb can set any yield for euro bonds, even one that is lower than Germany pays right now (see japan)?
    In other words, eurobonds could benefit all, incl Germany.

    Do you think that euro bonds would end the crisis?

    For fiscal discipline and necessary reforms they made the fiscal pact last December.
    What still lacks is a European watch dog with teeth that could enforce the discipline.
    How would you solve this discipline enforcement issue?

  11. Warren, the ECB has just rejected the plan to save Bankia on the basis that is was doing what you claim.

    So no, there is no solution and the system is closer to collapse with all the scaremongering by the ECB.

    The FED will come to the rescue again through swap lines, saving the system one more time? Is this just posing and political power games by the ECB to scare the markets and politicians in Spain? Will the ELA be enough to avoid bank runs in Spain?

  12. here a Californian that went to prison for a ponzi scheme. Using debt as collateral for more loans.

    Makes sense to the MMT crowd, it is just an accounting entry, you erase the old loan and replace it with the new loan, the old loan magically goes away…and no inflation!

    Even better is if you can bride your government to allow you to print as much money as you need to pay off your old loans. An endless money machine, print, skim off $1 billion or so, print, skim, print, skim, … makes perfect sense…

    …except that it is criminal, anti-american, anti-captilism, anti-democracy, and plan ignorant for those that believe it.


    1. you need to reread the 7 dif

      with taxation the economy needs the gov’s spending to get the funds to pay taxes and net save.
      net savings of financial assets in the gov’s currency can only come from govt spending more than it taxes.
      unemployment comes from the deficit being too small to supply the funds for taxes and net savings.
      so the point of deficits is to offset net savings desires.
      right now that means either a tax cut or spending increase is in order.
      the euro zone don’t have any provision for the issuer- the ecb- to supply the net spending, so the open channel is the member nations, but they
      don’t have the ‘credit worthiness’ also by design. So they need to be made credit worthy to supply the net savings/public deficits as above.

      And remember, it’s not ponzi when the support is coming from the issuer of the currency, as per previous posts.

      The currency is a tool to manage the real economy, presumably for public purpose, not a real resource per se.

  13. Europe’s debtors must pawn their gold for Eurobond Redemption – (when daylight robbery gave way to thieving in the night)
    Southern Europe’s debtor states must pledge their gold reserves and national treasure as collateral under a €2.3 trillion stabilisation plan gaining momentum in Germany.
    The German scheme — known as the European Redemption Pact — offers a form of “Eurobonds Lite” that can be squared with the German constitution and breaks the political logjam. It is a highly creative way out of the debt crisis, but is not a soft option for Italy, Spain, Portugal, and other states in trouble.

    1. yes, but they are still getting funded, and banks haven’t been shut down for lack of liquidity as the ecb keeps funding, and govs keep spending according to plan

  14. Warren,

    According to the following article

    direct or indirect ECB intervention is the only thing which can save Spain as a member of the EU the at the moment. While Greece can be in theory isolated Spain is too big to fall. There is no room for further austerity there because people are on the brink and this is the country which has a tradition of political instability in the past. In my opinion if the current indecisive policy of capping bond yields at 6-7% is continued, the ECB may end up owning the most of the Spanish debt.

    Do you think that the German decision makers understand what is going on? I am fully convinced that the Polish government understands the gravity of the situation but what about the real decision makers?

    Do you think that in the end a messy default of Spain is possible or will the Germans really do “everything possible” to avert the end of Eurozone (that is instruct ECB to purchase an unlimited amount of bonds)?

Leave a Reply to Art Patten Cancel reply

Your email address will not be published. Required fields are marked *