mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Did Germany Just Blink?

In recent days world markets have rallied as the scale of ECB funding to Europe’s banks becomes clear.  A torrent of euros has gushed into bank vaults all over the Old World: something like $700 billion dollars.  The money comes at an attractively low interest rate: one percent.  (There are days Via Meadia wishes we were a large and troubled bank so that authorities around the world would stuff money into us like French farmers feeding a goose to make fois gras.)

As Floyd Norris correctly notes in a very smart piece in this morning’s New York Times, that is what central banks do.  The ECB is providing essential and essentially unlimited liquidity in a moment of crisis. By bailing out the European banking system, the bank is indirectly bailing out the troubled Club Med governments.  Banks who are paying one percent interest for a loan lasting three years can lock in a nice profit by buying Spanish or Italian government debt at three or four times that interest rate.  (Attention all central bankers: Via Meadia is willing to provide up to one trillion dollars to troubled European governments if someone will just give us the trillion to start with.  Wire the money to the stately Mead mansion and watch those Italian interest rates come down.)

The result of all this has been to ease the short term crisis.  It is now very unlikely that any European country except for Greece will be melting down over a long weekend.  Barring unexpected new plot twists, we can all finish our Christmas shopping without worrying whether Europe will be around for the New Year.

There are lots of questions about what comes next, but one thing looks clear: the Germans backed down.  They were using the threat of a European meltdown to force the Club Med countries to undergo painful reforms now and sign solemn treaties swearing that they would never, ever do anything fiscally bad. The treaties are unwritten and the reforms are still very partial, but the Germans have let the ECB turn the money spigots back on.

The Merkel government isn’t talking much about this, but it looks very much as if the Germans have bailed out the south with one of the greatest monetary expansions in history — while swearing that they would never do any such thing.  Via Meadia advice: follow the German discussion over the mass bailout carefully over the next week or two.  Have those industriously Teutonic ants decided to feed those lazy Latin grasshoppers once again?  Do Frau Merkel’s colleagues in the Bundestag understand what just happened, and if not, what will they say when the penny finally drops?

Features Icon
show comments
  • Cromwell

    I don’t know. 3-yr LTROs MAY help banks recapitalize — that’s what the Fed did here, with zero interest rates that could be used buy US 10s yielding 3% (average yield from Nov 2008 to now). However, I think it’s more likely the EU banks used a big chunk of the EU489b offered by the ECB to roll other facilities, likely left around EU200 for “other things.” Thats not enough to meet Italian and Spanish 1Q financing needs.

    More important, the LTRO might help bands liquidity needs (the 3-mo and 1-yr euro basis swap has come in since the start of the month, suggesting funding pressures easing) but the problem in Europe is one of sovereign solvency. At best, this and the LTRO due in early 2012 buys the EU “leaders” a bit more time but it in no way resolves the German/French dispute of which you’ve written so eloquently, Dr Mead

  • Andrew Allison

    “Banks who are paying one percent interest for a loan lasting three years can lock in a nice profit by buying Spanish or Italian government debt at three or four times that interest rate.”
    The ECB appears to have decided that the Fed’s policy of socializing the losses of the Banks while enabling them to repeart the process of privatizing gains makes sense. Only if you’re a banker!!

  • Mark Michael

    Steve Martin joke, “Let me tell you how you can avoid paying taxes on a million dollars! First, get a million dollars…”

    Somehow your column brought this to mind. Don’t know why.

  • Otiose8

    I think it premature to conclude that Germany blinked.

    The interbank markets are frozen because no bank dares lend out to any of the others. They have strong incentives to place their money with the ECB.

    Many of the banks have been borrowing on much shorter terms than this 3 year money.

    The ECB is just acting as a clearing house for the banking system for the majority of the money lent out.

    And then it is very unlikely – no matter what the politicians want – that a Spanish bank, for example, will use these resources to buy Italian government bonds. There’s the credit risk and for longer terms refinancing risk.

    There is some room for the governments to pressure their own local banks to buy new government bonds or at least to roll over existing holdings.

  • Luke Lea

    If Germany would get over its inflation paranoia, the ECB could inflate the Euro enough to reduce the sovereign debt ratio and wages in Greece (in real, not monetary terms) enough to weather this crisis, at least in the medium term.

    Germany financed WWI by printing money and then did more of the same to deal with Allied reparations. These were extraordinary circumstances of enormous dimension, not likely to be repeated.

  • Dean Jackson

    The actual injection via the LTRO was substantially less when you account for the runoff of shorter term ECB loans. Estimates vary somewhat, but something just over E200B.
    Additionally, there is serious question about whether these loans will be used to purchase additional sovereign debt. The International Financing Review covered this topic with quoted sources last week.

    Banks resist European pressure to buy government debt

  • rkka

    ” Have those industriously Teutonic ants decided to feed those lazy Latin grasshoppers once again?”

    Do industrious Teutons like selling their exports to those lazy Latins? Or should they just sell to Russians who can pay in energy and raw materials? Since Nord Stream started pumping Siberian gas under the Baltic this fall, Germany and Russia have been developing closer and closer economic relations, to the chagrin of Baltics, Brits, Poles, and Americans. It’s been fun watching Russophobes foaming helplessly at the mouth over it.

  • Jacksonian Libertarian

    Politicians will always kick the can down the road if given the opportunity to do so. Eventually the German voter is going to decide how far they will go in bailing out the PIIGS. If Germany decides to leave the Euro, they will leave the ECB holding the bag and only be responsible for their own Euro denominated debt which they can likely payoff at a discount if they pay with Deutschmarks. Eventually this will be explained to the German voters, that they would be much better off leaving the Euro, and getting the parasitic PIIGS off their backs, and any lost business they suffer they were going to suffer anyway.

  • Jim.


    If African-Americans in the old South had been paid for all the cotton they picked, but forced to give the money they were paid to their “customers” so they could continue buying cotton, would they have been any less enslaved?

    The Greeks and Italians need to be cut off.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service