14 Jan 2012

How to break the stranglehold of the ratings agencies

(Pour une version française, cliquez ici).

Standard & Poors has just downgraded the ratings for 9 eurozone countries, including France, which has lost its triple A status. We can expect massive austerity because the banks will charge even more interest than they do already. Right?

Wrong!! There is absolutely no need for taxpayers across Europe to put up with this blackmail.

One of the reasons S&P degraded the French rating is that French banks are too exposed, having lent large sums of money to the Greek government, who can't pay back the money they owe. It's hardly a surprise given that the interest rates they are paying have just increased again, from  17.92% in November, to 21.14% in December, meaning that their interest payments are now eating up 30.6% of GDP. It is completely stupid. Maybe the next step will be to offer them payday loans at 4000%, like the ones offered to millions of desperate people in the UK?

Can noone see that there are two perfectly sensible ways to get out of this ridiculous situation?

The first is based on the idea that I proposed recently that takes advantage of Paragraph 2 of Article 123 of the Lisbon Treaty that allows the ECB to lend to publicly-owned credit institutions. This fact has been deliberately obscured by Mario Draghi who insists that he is prevented from lending to anyone except commercial banks by the Lisbon treaty.

Thus, at the next ECB organised money-printing festival on the 29th of February, a publicly-owned credit institution such as the French Caisse des Dépôts et Consignations could perfectly well borrow 340 billion euros from the ECB, and lend it to the Greek government, who could then use the money to completely reimburse all the 340 billion that they owe. Immediately, they would be able to pay back the debt via the Caisse des Dépots to the ECB at 1%, instead of the 21.14% rate currently imposed by the banks.

Everyone should be happy. The Greeks will save something like €67 billion a year in interest payments. But it also means that the banks and governments in the other countries will no longer be holding Greek debt. The figures are shown in this graph from a BBC report.

France would be able to write off the €56.7 billion of exposure. And for Germany the number is €33.9 billion.  Even the UK would be able to cancel €14.6 billion worth.

This has to make good sense for the French government. So why not do it? Go on Sarkozy - do it right now, and tell Standard and Poors to get stuffed!

But there is a second way of getting the Greeks out of the quicksand in which they are engulfed. And for that we wouldn't even have to wait till the next ECB bank freebie day on the 29th February. The fact is that after the 21st December, when the ECB threw 489 billion euros of cheap money at 523 banks, most of that money has been parked back with the ECB - where it is just getting 0.25% interest. When I asked the ECB who had borrowed the money, and how much, I was told that it was all confidential information. We have no way of knowing.

But that means that there are banks that are sitting on money that could be used to solve the Greek crisis at a stroke. On monday, €464 billion was parked overnight with the ECB. Clearly, the banks are totally clueless. So, given that they don't seem to have a brain cell to rub between them, they should be obliged to lend the Greek government the €340 billion needed to cancel the debts to the banks immediately.

In principle, banks should want to do this voluntarilly. After all, French banks would get €42 billion back immediately. But, surely, even if they don't want to, there must be a way for the ECB to put pressure on them to behave responsibly?

If they refuse, which they might, then it would be the clearest possible demonstration that the free markets are totally incapable of functioning in the general interest. Indeed, the only interpretation I can offer is that banks refuse to lend the money to the Greek government because it would break the first law of banking - namely, if you can force people to sign up for a loan at 21.14% you should never consider allowing them to get money at 1% - even if the consequences are the total collapse of the financial system.

So, there we have it. Two perfectly viable ways to solve the crisis. One that could be implemented today, the other that would need to wait till the 29th of February.

Is there anyone out there listening?


  1. Excellent.I say again: As to the answer why don't politicians implement these measures or why haven't they up to now - it's because they're at the same time private citizens with quite a lot of money to spend. This money, which they've made sure they get by passing the corresponding pay and pension rises, is then invested on 'the markets' - those nasty things everybody hates at the moment as it's what has the economy by the short and curlies. So, as you rightly mention, here is another golden goose but at the individual level. It is by now perfectly clear why certain individuals become politicians and if they can themselves benefit from buying up national debt on top of the perks they get from the job, why on earth should they rush to 'solve' the situation? Je propose:That no one in public office should be allowed to trade on the markets, in the same way as it is illegal for persons with inside knowledge to benefit from said information.

  2. It would also help if the European Central Bank would, like any central bank, be allowed to be lender of last resort, instead of this indirect approach. 
    But yes, why not. What is for sure is that Europe, including Germany, have to realise that they are all in this! Yes, yes, the Greeks are bad, very very bad. But get over it and don't let everything explode just because the Germans step on the brakes with all their weight. 

    Europe can solve this so-called crisis tomorrow - literally!
    For some reason it has chosen to self-destruct instead. Bizarre.

  3. Thanks Christian

    I would actually be in favour of banning the creation of money by commercial banks and moving all money creation to the Central Banks. That would definitely require rewriting the Treaty of Lisbon. But for the time being, just using the indirect route is quite sufficient to short-circuit the bond markets and get governments off the hook.


  4. When all the €500 billions issues by the ECB land back at the ECB, because the individual banks are  too scared or undecisive, there will need to be some clear guidance. I wouldn't wait for the banks to become aware of a bigger picture beyond their balance sheet. They cannot act in concert. 
    They need to be instructed.

    At the moment free market approaches and institutional respect/etiquette do not result in decisive effective action, but in more vagueness. 

    When markets don't work it is up to the politics to step in. But it seems more convenient to recite mandate limitations and avoid responsibility. 

  5. Indeed Christian.

    Blocking Central banks from lending to governments might be considered justified if it was to prevent the governments spending money that they don't have - and causing inflation. But I would make a very different judgment on using the money to pay off debt.  This could easily be added to the reworked Lisbon Treaty that people are currently talking about.

    Since all governments have large debts - and the Germans are actually the worst- they owe 2 trillion euros - limiting the use of central bank money to loan repayment will go a long way. There are currently debts of virtually 10 billion if you take all the 27 EU countries.


  6. Seems to me that if you're all so sure that Greece is a safe bet, then you can lend them some money. You'll get a good rate of interest and so will Greece - win-win until they default. 

    If governments felt the same they could also lend. I think it's indicative that no-one is willing to lend, and your solution is that unwilling lenders be forced to lend. It's a cop out. 

    Greece is bust.

  7. Jrussel88,

    You have read my propositions haven't you? Just to recap, I propose that the ECB should lend the Greek government the money they need to repay the markets, and get the same rates that the banks are offered (1%), instead of the 25.71% charged by the markets. But in return, they should be required to implement a fraud prood FTT whose rate would be set to generate the revenues needed to pay off the debt. It would cure the current Greek problem of massive tax evasion which, coupled with the greed of the bond markets, has made their position impossible.

    Something tells me that with my cheque book, I won't have the negotiating power needed to impose an FTT in Greece. But the ECB, which printed 489 billion for the banks on the 21st of December, can generate as much money as it wants.