Showing posts with label ECB. Show all posts
Showing posts with label ECB. Show all posts

Sunday, 2 October 2016

Pictures of Trouble

Two charts from the Bank of England sum up interesting aspects of capitalism's problems today.

First, the decline in long-term government bond yields. These have been on a steady downward trend since 1990 (actually, for even longer, since the mid-late 1980s), as shown in the following chart which gives GDP-weighted average 10-year yields for the top 20 countries. It is not only that nominal yields have fallen alongside lower inflation, but 'real yields' have also fallen and are now negative. The estimate of real yields is only approximate, but the picture is clear enough.

Chart 1: 10-year government bond yields, 1990-2016




The drop in yields has been accentuated by central bank asset purchases under 'quantitative easing' (QE) policies, but not fully explained by them. Outside Japan, QE only got going from 2008. Lower yields are a problem for pension funds and other bond investors, while making the huge debts accumulated by borrowers (see earlier articles on the blog) somewhat easier to service and pay back. This delicate, unstable balance results from the difficulties the capitalist economy has had producing enough profit, or growing enough to produce anything extra at all.

Chart 2: Central bank balance sheets, 2006-2018



The second chart shows the shows the rise in central bank balance sheets as a percentage of GDP. This has come about as a result of QE policies, and the Bank of Japan (note that only Japan is measured on the left hand axis), the Bank of England and the European Central will add to their accumulated assets in the next few years. Only in the US has the share of GDP not gone up recently, and is not projected to under current policies. Even for the US, the absolute holdings of Treasuries and mortgage-backed securities are not likely to fall by much.


Tony Norfield, 2 October 2016

Sunday, 28 June 2015

Greek Lessons


Here are some points to consider when sorting through the news stories about Greece.

The media coverage is naturally focused on day-to-day events. However, the key point to understand is that, long before the crisis broke in 2010-11, the Greek economy was unviable. It had for many years been dependent on grants from the EU, extensive credits and low interest rates. Before the 2008 worldwide financial implosion, these boosted Greek living standards. Post-2008, there was the reckoning, starting with much higher borrowing costs.

What had characterised Greece both before and after 2008 was a low level of tax revenues compared to state spending, but this was only another way in which its fundamental economic weakness was expressed. Greece had little to offer apart from shipping and tourism. But tourism had become more uncompetitive, while shipping was 'offshore', paying little tax. Along with other weak, usually southern European states, such as Portugal and Spain, but also Italy, Greece had found its competitive position undermined with the rise of cheap labour countries in Asia.

In 2010-11, the EU 'solution' was to lumber the Greek state with more debt so that it could pay off private bank creditors, mainly German and French banks. This was to avoid a reckoning in terms of writing off debts that could not be paid by adding to the debt pile which was now held to be held mainly by the Greek government. The political logic at that point was that the European banking system could not withstand taking more write offs when it was so weak, and the legions of policy-making geniuses had not yet managed to work out anything else.

A debt write off -  effectively 100bn euros or so - was then organised in 2012. Private creditors took a hit in a 'debt swap', being forced to restructure their 'assets' into loans at greatly subsidised interest rates. However, by that time, the Greek economy had collapsed under austerity measures imposed by creditors, so nothing improved and the ratio of debt to GDP continued to soar.

There followed a never-ending story of Greek-EU negotiations and subterfuge. By 2013, Syriza managed to convince itself, or at least had the political platform, that a much better deal was possible, both staying in the euro system and getting an end to austerity policies. After forming a government in January 2015, it did next to nothing to challenge the Greek oligarchs or deliver a reality check to the Greek middle class, its social base, and instead postured against Germany, the main creditor country, and annoyed all of its creditors. But, with their Ukraine policy falling apart, and with their policies in the Middle East and North Africa in a shambles, leading to many thousands of refugees trying to escape to Europe, the creditors had other things on their minds apart from endless meetings with recalcitrant Greek debtors.

So far, the Greek government has not yet defaulted on other official (government/IMF) creditors. But the European Central Bank (ECB) has extended many tens of billions of loans to the Greek government and given Greek banks another almost 100bn in emergency liquidity via the Greek central bank. On Tuesday there is also a Greek government payment due to the IMF, a default on which does not happen for a country that is meant to be one of the insider's club, yet there appear to be no funds to pay it.

The ECB may have today (Sunday) issued the coup de grace that the euro system is not otherwise able to deliver by refusing to increase its liquidity provision to Greek banks. So there will be a banking system closure in Greece on Monday, with no sign of when banks will be able to open again.

There is no legal mechanism for being kicked out of the euro, nor for a member leaving it, as far as I am aware. If anything, a euro member leaving might well threaten its membership of the wider EU. Yet, the ECB can stop doing business with one of its constituent parts, namely the Greek central bank. By stopping further funding of Greek's imploding banking system, the ECB, if it continues, will preside over the collapse of Greece's economy, forcing an exit from the euro system.

There are many economic details in dispute regarding the EU/IMF/ECB conditions to be agreed with Greece, but the creditor position at present is that the debtors have walked away from negotiations, so there is no more to discuss. One interesting angle is the question of taxes. Syriza's offer was to push the burden of adjustment onto corporate taxes rather than spending cuts, given that the latter would be focused on pensions, etc. Apart from any normal, reactionary bias in creditor demands, the inability of the Greek government to collect taxes must have been a factor in rejecting this alternative programme.

What happens in the next few days will signal again how far the 'independent' ECB is independent of the need to abide by its formerly sacrosanct rules in order to keep the euro political-economic system intact. A Greek exit from the euro is believed by many politicians to be less of a problem than it would have been in 2010-11. That is probably true, but it will nevertheless be a serious blow. One aim of Europe's bumbling ruling classes may have been to crush Syriza in order to undermine oppositional movements, such as Podemos in Spain. However, by showing that there is an exit door for euro members, even if it leads a lift shaft, this also shows that other countries may be pushed into it.

More broadly, the destruction of the Greek economy is a sign of what awaits other, previously privileged, countries that cannot make the grade in today's rapacious and imperialist world economy. If there is a lesson in the Syriza episode it is that a middle class-led movement that tries to restore the status quo ante inevitably fails.

Tony Norfield, 28 June 2015

Note: One of the first articles on this blog, 'Origins of the Greek Crisis', 24 June 2011, covered the background to recent events.



Thursday, 5 February 2015

Body Language: Germany, ECB & Greece

A picture paints a thousand words. Here are two pictures, and not many words, covering two events.

One is of the European Central Bank's Quantitative Easing programme, opposed by Germany, depicting the Italian head of the central bank, Mario Draghi (left), and Germany's finance minister, Wolfgang Schäuble (right). The second is of the new Greek finance minister, Yanis Varoufakis (right) with his German counterpart (left), after not even agreeing to disagree on Greece's proposals for managing its debt burden.
 





 Tony Norfield, 5 February 2015

Thursday, 22 January 2015

Europe Gets Even More QuEasy


Today the European Central Bank did what financial markets had expected, after lots of leaking of the policy moves. They announced they would buy securities in the asset markets, at a rate a little higher than had been expected of €60 billion per month, from March 2015. The policy will continue until inflation looks like getting closer to 2%, which, with the slump in energy prices, will be a while yet. In all likelihood, this extra asset buying (there has been some before) will amount to a bit over €1 trillion and last until September 2016, maybe longer. For comparison's sake, the new policy is around 10% of euro area GDP, compared to the US and UK policies of 'quantitative easing' that have amounted to more than 20% of GDP.
This policy move is the latest in a series that indicate there is no way out of the crisis. How can anyone believe that this policy, essentially making government bonds have even lower yields, can do anything for the economy when 10-year government borrowing costs were already less than 1% in Germany and France and less than 2% in Italy and Spain, the euro area's biggest economies?
The central bank's notion is that this will feed into private sector borrowing costs being lower, but there are some difficulties here. One is that there is very little demand to borrow to invest, given the dire economic outlook; the other is that banks would not to lend at anything like the sub-1% or 2% numbers to private investors, and the level of interest rates is not the problem. The problem is that there is no profitable avenue for large-scale capital investment, or any investment that does not depend upon government subsidy, tax dodging or some form of financial trickery. Even the countries that claim they have done better than the euro average - especially the US, but also the UK and Switzerland - are now faced with higher currency values against the ones that are under the market's cosh. Last week, the Swiss National Bank's made a dramatic move to abandon its 3-year attempt to stabilise its currency against the euro. This was done largely in anticipation of this week's action by the ECB and so far the euro's value has fallen 18% against the Swiss franc. Unsurprisingly, the euro fell another 1-2% today.
The ECB made a concession to German worries about the new policy. They said that 80% of the risk of the new purchases would be borne by national central banks, because central banks in the euro area might buy rubbish and face a loss. In its press releases today, they did not explain who would buy what, or how much. Because the scale of the buying, if it is not directed, would evidently be concentrated on the better risks - Germany, especially - a proviso was included: only up to one-third of a country's outstanding debt could be bought in this way, and the debt had to have a maturity of 2-30 years. Germany has around €1.1 trillion of debt outstanding, with less than this in the 2-30 maturity range. So these, the 'safest assets', will not be able to use up more than about a third of the new programme. German government securities out to a maturity of 5 years also have a yield that is zero or negative. So, presumably, this is good news for the government securities of France, Italy and Spain, the other countries with large bond markets.
The ECB's hope is that the lower yields will force investors to take on more economy-boosting risks. Instead, the likelihood is that there will be a continued reliance by capitalists on 'making money' through financial investment, something that further stretches the gap between value creation and financial accounting. On occasion, that gap is narrowed by a slump of financial market prices for bonds and/or equities, but the ECB has signalled that it will gamble for a while longer on trying to push the gap still wider.

Tony Norfield, 22 January 2015

Sunday, 26 October 2014

Moribund Capitalism

The credit market works like this: one person's debt to another is the other person's asset. As long as the debtor can pay, then the creditor feels fine, if a little anxious when the weather changes. Now consider what happens in the wake of a credit-fuelled economic boom and its subsequent collapse. What if the mountain of debt is also a deep well of crap? That is the situation today.

This is the basic reason behind the never-ending policy from the world economy's major central banks to keep interest rates at close to zero. Every time there is a suggestion of raising interest rates (some time in the current century ...) from zero point nothing percent to zero point something, financial markets threaten to implode. Despite data in some countries recording improved profitability of capitalist companies, this is the more tangible reality of capitalist prospects.

News has not been good, in any case: from falling equity markets, to ever more desperate measures from governments and central banks, especially in Europe and the US. Below is a striking picture given for the US, by the Federal Reserve Bank of St Louis.

The chart shows the asset holdings of the US central bank, the Federal Reserve, since 2007 (the annotations are mine). In the initial phase of the crisis, the Fed boosted its lending to financial companies dramatically and did a series of rescue operations. These have now diminished to negligible proportions, as what remained of the US financial system was put back on its feet by zero interest rates and financial bail outs. However, there are two measures that have not been reversed. In fact, they have increased, even though the crisis was meant to be over: an increase in Fed holdings of US Treasury (government) securities, now totalling $2,457bn (data up to 22 October 2014), and mortgage backed securities of $1,417bn. Consider these figures against the US GDP in 2013 of $16,800bn, and also remember that the latter is just private debt to the state, not private debt to others, which is even bigger.

Many American citizens paying their mortgage interest will no doubt be somewhat surprised to learn that the recipient is actually the US government. Still, you can't keep an innovative, private capitalist system down, can you. As for the US Treasury paying interest on its bonds and notes to the US Fed, well they manage to find a way to get the money back again. The wonders of finance!



These numbers show more fully than monthly changes in business activity what is really going on, and the intractable nature of the crisis that imperialist countries face. Unfortunately, I have no such telling pictures of the European Central Bank's dodgy assets which, in any case, will soon be boosted by its new purchases of 'covered bonds'; nor of the Bank of England's activities. The Bank of England has up to now had a more conservative approach of hardly buying anything other than UK government securities in the secondary markets in its 'quantitative easing' (it has £375bn of gilts on this book and nothing else). However, the Bank of England has extended what it will accept as collateral, with the relevant 'haircuts', and also increased the ways in which it will offer 'liquidity' to the financial system in a crisis.

In summary, Lenin's description of imperialism as 'moribund capitalism' comes to mind. The astonishing application of extraordinary measures can only produce such mediocre results, ones that leave many millions in crisis.

Tony Norfield, 26 October 2014







Thursday, 9 October 2014

The Wages of Sinn and the Euro Crisis


Today I went to the launch meeting in the City of London for the latest book from Hans-Werner Sinn, entitled Euro Trap: On Bursting Bubbles, Budgets and Beliefs. Sinn is probably best known as the President of Germany's Ifo Institute, as a well-informed, critical commentator on the European Central Bank and as someone who delivers withering critiques of economic and financial policies in the euro area. I have read some of his papers on the ECB's TARGET payments system - ones that explain the economic disaster of the euro project more clearly than one might expect - and have seen a video of an earlier speech on the euro crisis. So, I was intrigued to attend this meeting. The comments here are from my notes of his presentation. They will lack some detail, although they should nevertheless give the gist of what was said. I have ordered his new book, and will correct any misrepresentations once I have read it.
Professor Sinn's skill is in expressing his views very clearly, and with an abundance of supporting empirical evidence. Those who disagree with him may claim that he has got it wrong, but often they will be addressing a different question and not confronting the essence of what he is saying. This is certainly the impression I have had reading 'expert' spokesmen for the euro elite who criticise Sinn. Radicals, who consider him part of the reactionary establishment arguing for austerity, do not usually attempt to address his views at all.
Sinn's view of the (euro economic) world is straightforward. He admitted that he was initially a supporter of the euro project, with some reservations, and that he did not anticipate how badly it would turn out. He then focused on the facts that cannot be denied: most, if not all, of the crisis-hit euro countries went through a decade or more of falling competitiveness before the global turmoil (for the richer countries) began in 2007-08.
This falling competitiveness was based upon a growth of real incomes, consumer demand and public spending that outran the productive capacity of the individual countries. It was fed by falling interest rates that encouraged borrowing and, for the weaker countries, by a euro system that appeared to make lending to borrowers (Greece, Spain, etc) with much weaker economies have more or less the same risk as lending to those in the richer, stronger euro countries. The 'irrevocable exchange rate' of the euro, and the denial that any individual state would ever exit the system, covered up the gap in the euro project's construction: there was no agreed mechanism for rescuing insolvent states, in particular there was no unified fiscal policy, something that would have to have depended upon a political union of member countries, not simply a monetary union.
So, the euro system had no mechanism for dealing with the economic effects of divergent competitiveness reflected in the mounting levels of external debt (via current account deficits) for weaker countries. What happened instead was that the TARGET payments system for interbank transfers within the system simply led to ever-increasing liabilities of the uncompetitive and ever-increasing assets of the competitive, with the ultimate risk being put on the relevant national central banks. In practice, Germany's central bank has taken on the asset risk that German companies have in Spain, Greece, etc. The German companies get paid, but via a credit issued by the German central bank to its central bank counterparts in Spain, Greece, etc. This means that the German central bank, the Bundesbank, has questionable assets in its lending to the central banks of Spain, Greece, etc, while the Spanish and Greek central banks have liabilities to the Bundesbank offset by questionable assets from securities (and promises) delivered to them by their own domestic banks and companies.
That is bad enough, but things got worse. In recent years, the credit quality of collateral accepted by central banks from private banks in the euro system was reduced, the ECB embarked upon a series of measures to buy government and private sector securities and, in the latest measures, the ECB will also buy junk assets to 'rescue' private banks from their ownership of rubbish. Six crisis countries, claimed Sinn, have received more than €1,300bn of credit in this way, of which more than 80% has come from the ECB.
These points should make one ponder a while.
For all the protests about austerity, the euro system has invented new funds for crisis-struck countries in a way that has clearly transgressed the supposed neoliberal policy regime. Sinn noted that the US Fed, for example, would never have bought Californian state bonds. Instead, he complains, the risks of the economic disaster have been transferred to euro states and, hence, to the (German?) taxpayer.
Radicals will complain that the banks have been bailed out and rescued, while austerity continues. However, the real point is that Europe is an economic disaster area and there has been, so far, great reluctance by governments to force a market reckoning upon the mass of the population. Sinn is more conciliatory on this issue than one might think. He fears that mass unemployment, especially youth unemployment above 25% in several countries, will lead to political turmoil and extremism. He worries that 'productivity' is only rising in some countries because jobs are being shed, not because there is any productive investment. If one were to argue that yes, there has already been enough austerity, he will present statistics to show that there is another 10% to go in Italy, 20% in France and 30-35% in Spain and Greece before competitiveness is restored.
I do not necessarily agree with Sinn's numbers, but his case is clear and a few percentage points here or there make little difference to his main argument: the economics of (euro) capitalism demands austerity. All this, of course, raises bigger questions.
Sinn, despite appearances to the contrary, hopes that the euro system will survive, but he argues that it can only do so if it recognises its fundamental flaws. He proposes a 'temporary' exit of crisis-hit countries, who will then devalue their currencies and later re-enter the euro system, as of right. His solution is quaintly optimistic, but one should recognise that he favours European integration and political stability. The only problem here is that he insists that this must be on sustainable terms if it is to work. Critics of his position often focus upon Germany's benefits from the system, but he correctly notes that Germany itself had a long phase of labour market austerity in the 2000s, which is why the country has become very competitive. Above all, he wants a viable capitalist system, although with European capitalist stability high on his list of priorities.
Questions confronting those who are less concerned with saving the capitalist system, in the euro area, or elsewhere, are as follows. Firstly, it does not make sense to argue against austerity by making this an anti-German argument, as if German workers did not also have their own phase of austerity before. Secondly, an attack on 'austerity' must recognise the privileges of those in the EU/euro area who have benefited from their own countries' domination of international markets, through the control of trade links, patents or owning many of the key monopolistic companies. Fighting austerity at home is hypocritical if it does not recognise the way that the economic system subordinates others.
Thirdly, recognise that Sinn's arguments are the logical consequence of a clear-sighted capitalist perspective, and one that is also ameliorated by a concern for social stability. He has much better arguments about what is needed by capitalism today in Europe than the nonsense of 'alternative policies'. The proponents of the latter know they are dead in the water, but they might still attract some external funding, whether in advocating wind farms or whatever else. Sinn's position is to advance a policy that he recognises is a 'dismal option' - and one that he does not really expect to succeed, still less to make people happy - but he hopes it would be better than the current euro political decision to do nothing and instead to hope something will turn up.

It is unlikely that his policy recommendations will be followed, partly because euro politicians correctly see the barriers to any proposal that highlights what is really going on. Confronting an intractable capitalist crisis is something that the current generation of politicians cannot manage. The crisis has blown their legs off, yet they still dream of strolling down the road as in the good old days. Even if Professor Hans-Werner Sinn were to become the new arbiter of euro policy, that would still leave the system he seeks to sustain in question.

Tony Norfield, 9 October 2014

Sunday, 27 May 2012

Bankiarupt


The Financial Times reports the latest financial trick to emerge from the euro crisis. The Spanish government, which cannot sell its bonds at less than disastrous yields, has decided to bail out one of its major banks, Bankia, by directly giving it Spanish government debt securities that it would then exchange with the European Central Bank (ECB) for much-needed euro cash. This will help the Spanish state find the funds – reported as €19bn – to manage the overall bank bail out. Apparently, Cyprus will follow suit.

My view has been that the euro project is such a longstanding and important construct for the major European powers – Germany and France – that they will move heaven and earth to defend it. Earlier plans attempted to create a firewall around Greece, though still to keep it within the euro system. I admit to some reconsideration now.

It is not simply the possible rejection of austerity measures in Greece that creates for Germany and other creditor countries the prospect of unending, unproductive subsidies that they are likely to reject. The scale of the problems in Spain, and other countries too, means that the numbers have simply become too large. When it comes to hundreds of billions of euros, then Germany and other creditor countries in Europe will begin to ask questions: can this money be better spent than on bailing out recalcitrant bankrupts? Especially when their actions, as with Spain’s latest move, only add to the burgeoning liabilities of the ECB. Spain is essentially saying that ‘We cannot pay for the bail out, so we are passing the ball to Europe’ – ie the creditor countries who will back up the ECB.

This is such a big crisis that the resolution is not something to be sorted out over a policy weekend, as many previous weekends have shown. It is also more than facile to expect anything progressive from Hollande, who will simply act to protect France’s interests in the troubles ahead – essentially by making Germany pay more, if possible. A long, hot summer is ahead in Europe.


Tony Norfield, 27 May 2012

Tuesday, 20 December 2011

Europe's Crisis Measures

It doesn't really matter what you think about the prospects of the euro system surviving long-term, or how much you might focus on the evident flaws in its design and the economic trials of its members today. It is a political project, and state power is now being used to save it. My own view, expressed in the previous article 'Cameron, Merkozy & Europe', is that it will survive for an indefinite period (ie for a year or so, at least). The debt numbers are vast and the austerity to come is horrible, but the alternative is far from attractive, even for Greece.

More importantly, Germany and other key powers are not likely to give up on a system that has worked for them in the past and might still work for them in the future. One sign that this is true is the change in the operations of the European Central Bank. Look at the latest FT story on how expansive their credit will now be. The ECB is offering a huge volume of 3-year loans - perhaps more than €500bn - at low interest rates to banks, funds that they can use, and probably will use, to finance their governments as well as themselves. This far from 'solves' the crisis, but it means that the risk of the euro system tripping into an abyss over the next year because the banking system collapses is far less. The ECB may not be a 'lender of last resort', but it is a lender that understands when its existence is at stake. This measure is a signal of the absurdity of thinking that central banks are 'independent'. Independent of what exactly? They are certainly not indifferent to the viability of imperialist capital. Ask the Fed, the Bank of England or any of the others that have amended their formerly sacrosanct rules in order to try and save the system.

Tony Norfield, 20 December 2011

Wednesday, 23 November 2011

Bunga Bunga Bund?


Germany today held one of its regular auctions of government securities, an auction that turned into what was reported to be a ‘disaster’. There were no explosions and casualties, but the event highlights another stage in the worsening economic and financial crisis. Germany, the euro area’s richest and most powerful member, could not borrow as much as it planned to. How much worse is it going to be for the other members, or indeed for all heavily indebted countries?

Occasionally it happens that a government auction of securities does not attract enough investor finance. This can occur when financial markets are in turmoil and decide that the price is not low enough. However, usually the government is aware of the problems and the auction is managed ahead of time. In general, the volume of bids received is more than what is on offer. Even if the bids fail to reach the planned auction size, when things go wrong, then the rare shortfall is only on a small scale.

This time, however, investors only bid for 65% of the €6bn of new 10-year bonds on offer, and some of those bids were much lower than the government would accept! The end result was that the government only sold 61% of what it had planned, leaving it holding the remaining €2.36bn unsold bonds. This size of deficit is extraordinary; there has been none as large since before the launch of the euro in 1999.

The deficit may reflect the fact that German 10-year yields had fallen below 2% and so were unattractive to private investors. Yet, the yields had fallen so low because Germany was always seen as the ‘safe haven’ in Europe, at least within the euro financial system. In the crisis, German yields would fall as the yields on the bonds of the weakest countries rose. Collapses in global equity markets also encouraged funds to flow into bonds: better a low yielding bond than losing as much as 10% in a week in equities. But the failed auction is more likely to signal that Germany will now find that it has less ability to be favoured by capital markets given that it is seen as the paymaster for a system drowning in debt.

Germany’s 10-year yield rose by nearly 15 basis points (hundredths of a percent) today. Clearly this is not a big move in absolute terms, and it still leaves the yield level at close to 2.1%, while the euro’s currency value fell by a little over 1% versus the US dollar, again nothing drastic. But this event could prove to be a turning point for the euro system because it can be seen as a clear warning to the German government.

Current euro area policies are evidently not working to resolve the troubles of highly indebted countries like Greece and Italy, but they may also now begin to impact Germany itself. One other indication is that since the summer, the cost of insuring against a German government default over the next five years has risen from relatively negligible levels of around 40 basis points – a level in place since 2010 - to close to 100 basis points. However inaccurate, biased or irrelevant you may think Credit Default Swap insurance prices are, they are now two and a half times higher than before, a fact that will not have escaped the German authorities.

This trend cannot persist, and at some stage in the coming three-to-six months it is likely to provoke a reaction.[1] If Germany stays as the implicit guarantor of the euro, but does nothing to formalise this position through an explicit political commitment, then it will face a euro crisis that will get steadily worse, both for other member states and, more importantly, for itself. So it must either explicitly ‘opt out’ of the euro commitment, which means risking the break up of a political and economic project from which it has benefited greatly in the past two decades, and to which it still proclaims commitment, or it must agree to some version of euro-wide bond guarantees or financing by member governments. So far, the euro policy hierarchy has made laughable suggestions of leveraging the funds of the European Financial Stability Facility, when the EFSF itself cannot borrow in the market and the scale of its funds, even after the proposed leveraging operation that remains imaginary, will prove inadequate. The reason for the prominence of technocrats at all levels of euro politics is that the key politicians have not made, and perhaps cannot make, a decision.

One interesting crisis that may be on the near horizon concerns the European Central Bank. So far, the ECB has bought tens of billions of euros worth of government bonds issued by Greece, Italy and other member states. This is unusual, but allowed within its existing mandate. The orthodox argument is that this is providing liquidity, or ironing out unjustified market moves, even though it acts to try to neutralise the operation of the market that forces yields higher. The ultimate sin that the ECB has not yet committed, and which goes against the current rules, is to buy bonds directly from governments. Its purchases have been in the ‘secondary market’, ie after the bonds have already been sold. If the ECB moves to buy bonds directly from governments, for example by taking part in government bond auctions, then that will be monetising debt – creating money to pay for government deficits. Such a move is under way already by the US Fed and the Bank of England, with limited controls so that the pretence can be made that it is not really (much) monetisation. It is hard to see Germany allowing this option, but who knows, if push comes to shove, and the next few Bund auctions do not attract enough buyers?[2]



Tony Norfield, 23 November 2011



[1] I say 3-6 months because things are happening so quickly that what you think could take up to several years of agonising will probably occur much faster! From a market point of view, there are pressure points that usually occur in the lead up to year-end (ie now) and also in February-March, when a wide range of companies and various financial institutions make their forecasts and business decisions for hedging and investment. Two of those trigger points are within the next six months.
[2] The usual media commentaries about a German phobia of inflation always relate back to the post-World War 1 hyperinflation. I have found this implausible. The fact remains that the hyperinflation period was in the early 1920s, so anyone alive now (not many!) who actually remembers that is probably around 100 years old. This is not a plausible national memory for today, despite there being some German museums (always covered in TV explanations) that illustrate the ‘wheel-barrow’ money of the time. An important, and more recent bout of inflation that never gets much attention is the inflationary Nazi policy during WW2 that was one factor behind the replacement of the Reichsmark in 1948. Or perhaps the German anti-inflation sentiment is a result of the austerity and low incomes of the first decade or so after 1945 – with the view that higher prices would drive real incomes lower still? Any views or information on this would be welcome!