Felix Salmon looks at the latest strategy to save the Euro:
[I]t’s worth looking at the bull case for the eurozone, as spelled out by the likes of Foxman and Tyler Cowen. At heart, it’s pretty simple:
- The way to solve the euro crisis, at least for the next couple of years, is for the ECB to act as a lender of last resort.
- The ECB is, quietly, doing just that — specifically by lending money for as long as three years against a much wider range of collateral than it accepted in the past.
- Even though that money is going to banks rather than sovereigns, the banks will borrow as much as they can, at interest rates of about 1%, and invest the proceeds in Spanish and Italian debt yielding more like 6%, in a massive carry trade.
- Which means that the ECB is, effectively, printing hundreds of billions of euros and lending it to distressed European sovereigns after all.
Sounds reassuring. The only problem, though, is that nothing is forcing the banks who are getting cheap money from the ECB to actually buy goverment bonds with that money. In fact, as Salmon points out, banks are selling off European sovereign debt as fast as they can. Salmon concludes:
There’s an argument that it doesn’t really matter whether the banks buy Italian and Spanish debt or not: the main thing that matters is that the ECB is printing money, which is entering the system via the banking system, and which will ultimately find its way into sovereign coffers one way or another, especially since there’s precious little demand for commercial bank loans these days. But I don’t buy it: there’s a virtually infinite number of potential investment opportunities around the world, and there’s no good reason to believe that the ECB’s cash is going to wind up funding Italy’s deficit rather than, say, getting invested in Facebook stock.
If Europe’s banks use ECB cash to deleverage and buy back their own high-yielding debt securities, the investors getting that money are not going to automatically buy sovereign bonds with the proceeds....
...The eurozone’s sovereign crisis is here to stay.
So the ECB, because of the restrictions on its mandate, is in the worst of both worlds: printing lots of money without actually addressing the sovereign debt crisis. At least it will enrich the bankers...