Is using the ECB to pay off debt dangerous?

In my last post, I made the suggestion that the ECB should loan the Greek government the 329 billion euros needed to wipe the slate clean. This would allow them to get free from the stranglehold that the markets have by imposing the 17.78% that they currently charge for lending money.  They could impose the introduction of a floating FTT that would be automatically adjusted so that, each month, the ECB would receive the amount needed to pay off the entire loan progressively over 10 years with interest at the rate of 1.25%. I calculated that this might be possible with an FTT of only 0.08%, although obviously, this would increase if the amount of speculation in the Greek economy dropped.

It seems to make a great deal of sense to me. So, why would anyone object?

Well, I suppose that it could be that the German government might object. After all, they have been very much opposed to any move by the ECB to print euros (using something like Quantitative Easing). They could argue that this would lead to an effective devaluation of the Euro.

However, I suspect that this might not be the case. The reason lies in the fact that much of the money that was lent by banks to the Greek government may in fact result from the magic wand of fractional reserve banking. In other words, it is money that didn't really exist. The banks just created it out of thin air when the Greeks signed the loan agreements. As the positive money website explains very clearly, when this sort of money is paid back, it simply disappears. The banks who did the original lending didn't have to borrow the money and they don't owe it to anyone - they just created it by adding a sum to the credit available to the Greek government. As a result, repaying the loans would have no effect on the value of the euro.

If the ECB lends money to the Greeks, and the Greeks then pay the money to the banks to cancel the debt, the money just disappears. It's the exact equivalent of the magic process of creating money out of thin air but in reverse. The debt (and the money) just disappears.

In such conditions, there would be no need for the Germans to complain, because the ECB would not in fact be pumping money into the economy. They would simply be removing the debt burden by a clever slight of hand.

So, what's to stop the ECB doing this? Is there anyone who could really complain? And if it works for the Greeks, why not use the same trick for the Italians, the Portuguese and the Spanish, all of whom are being forced to pay excessive interest rates because they have overstepped the (completely arbitrary) limits on public debt as a percentage of GDP imposed by the convergence criteria.

This must surely be a way to break the strangle hold that the markets have over governments. As soon as the markets start to charge usurious interest rates, the ECB should be able to step in with a loan that can only be used to pay off the debt. Note that these loans should not be used for anything other than loan repayments - we don't want countries to be tempted to spend money that they don't have.

The other big plus is that this would provide a way for the ECB to get countries to implement a Financial Taxation Tax - something that the EU is actively trying to promote. Although some people may not be keen at first, my bet is that as soon as one country has worked out that it is a much better way to get tax revenue than any of the existing mechanisms (specifically Income Tax, Taxes on Profits, VAT and so on), world leaders will be queuing up to apply the same reforms in their own countries.