1 Jan 2012

A way out of the ECB lending fiasco?

Yesterday, I was moaning about the fact that Mario Draghi, the new head of the ECB, decided to print unlimited amounts of money and hand it over to banks on extremely favorable conditions. Roughly 1% interest over 3years. There wasn't even any limit to the amount of that could be printed. As it happens, 526 banks took advantage of a one hour long window on the morning of the 21st December, and they got 489 billion euros.

The hope was that the banks might take on some sovereign debt, and help countries like Greece and Portugal who are currently being strangled by the bond markets, who are charging rates of around 18% and 12%. But no, what have the banks done with the money?  It turns out that most of it (412 billion euros) has been parked back with the ECB who pay just 0.25% interest. I suppose we should be grateful that they didn't use it to pay bonuses.

There is simply no way that politicians can trust the free markets to do what is useful. Hand the banks nearly half a trillion euros of cheap money and they stick it under the mattress.

The ECB claims that they have to do it that way, because of Article 123 of the Lisbon Treaty that prevents Central Banks lending to governments. It's clearly completely stupid. It would be far, far better to lend the money to governments in need, rather than praying that the banks will do it.

The obvious solution - revising the Lisbon treaty to remove article 123 - has been made impossible by the fact that David Cameron has vetoed any chance of modification. What a stroke of genius. He must like the current idiotic situation where his mates in the City can get hold of 489 billion euros of ECB money for 1% interest, or 75 billion pounds of QE from the Bank of England - all with no strings attached. That's all money that should be going where it is needed - not to pay bank bonuses (or whatever).

However, I have a cunning plan that could provide a way out. The ECB has to print/lend money to specific banks and credit institutions that are then obliged to lend the money to countries like Greece at the same rate (1%) that the banks are given.  Actually, the second paragraph of Article 123 seems to make this option a real possibility :
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.
Why not simply create a "publically owned credit institution" in each of the Eurozone countries that could be a route for funneling freshly printed ECB euros to the governments that need to get out of the clutches of the bond market loan sharks? The money could be then be transfered to those governments but with some very strict conditions.
  • First, the money can only be used for paying off government debt - not for current expenditure. 
  • Second, the money has to be paid back with interest at the level that the ECB is offering to banks (1%) with fixed repayments.
  • Third, countries that took advantage of the scheme could be required to implement a variable rate FTT mechanism that was automatically adjusted to guarantee that the payments were made.
I can't see any reason why this wouldn't work. Can you?


  1. Thanks m3. Yes, Jefferson was absolutely right. But right now, I do think that there is a way out. My Eureka posting from a couple of days ago makes me think that we now have a way out. The 99% have to demand that their governments use "publicly owned credit institutions" to borrow the unlimited amounts of ECB money that is on the table, and use it to pay off their debts to the markets completely.  That way, they will be able to pay back money with the same interest rates that the banks are offered. The markets will no longer be in a position to blackmail governments, and the ratings agencies will lose their power.



  2. Oh, we've always had a way out. Supposedly it's governments who pass legislation ...