Yesterday, the Deep End may have given readers the impression that there's something amiss with the world’s foremost private sector financial institutions. Today, we offer a balancing view, which is that there's something amiss with the world’s foremost public sector financial institutions too.
There’s no better example of this than in the Eurozone, where every rescue package seems to reach new depths of deliberate obscurity. By way of a supporting argument, we turn not to some Eurosceptical source, but to Yanis Varoufakis – a leftwing Greek economist, who desperately wants to save the single currency:
- “The European Central Bank (ECB) is the only serious institution that the Eurozone has. It was meant to be the guardian of the euro’s credibility but, alas… the ECB proved incapable of playing this role. When toxic capital flowed disastrously into the Periphery, the ECB whistled in the wind. When it flowed out… the ECB was part and parcel of this crime against the peoples and the spirit of Europe. Now that the chickens are coming home to roost, the ECB is pledging to do “all it takes” to save the euro, but fails to back up such strong words with deeds.
- “The reason for the ECB’s failure is that its most powerful constituent part, the Bundesbank, is refusing to contemplate the two ‘normal’ operations that would stabilise the euro: (a) capping Peripheral spreads via unlimited bond purchases, and (b) a banking license for the EFSF-ESM in conjunction with a commitment to recapitalising banks directly.”
In other words, the ECB is failing to turn on the printing presses – as its counterparts have in Britain and America. So, what is it doing instead? Well, it’s complicated. Here’s one part of the overall picture:
- “It [The ECB] cuts Greek banks off ECB liquidity and turns them toward the Greek Central Bank’s ELA program; thus increasing their borrowing costs.”
‘Liquidity’ here, means the loans necessary to allow banks to function. ELA stands for Emergency Liquidity Assistance, which is an arrangement that allows Eurozone member states to use their central banks to lend to their independent banks. The opacity of the scheme allows such trifling consideration as collateral to be fudged, the inherent riskiness of which is reflected in the higher borrowing costs.
But what do the Greek banks do with this ‘liquidity’?
- “…on 14th August, while most Europeans, and Greeks, were on holiday, the insolvent Greek government issued around 4 billion euros of T-bills for the purpose of pretending to pay off a debt of 3.2 billion to the ECB… these T-bills were snapped up by the insolvent Greek banks…”
And the purpose of owning these Greek government bonds?
- “…posting them as collateral with the European System of Central Banks (via Central Bank of Greece and in the context of the ELA) so as to gain access to much needed liquidity.”
And thus the Eurozone’s financial roundabout turns through 360 degrees:
- “In a full and ridiculous circle, the ECB system financed the Greek state’s repayment to the… ECB guaranteeing, in the process, that the insolvent Greek state’s debt and the insolvent Greek banks’ debt grew.”
So, there you have it: at considerable cost to the Greeks, the “ECB system” is basically lending money to itself.