Out of the goodness of their hearts.

Not if, but Wen-

China’s Wen Suggests Euro Funding After Meeting With Merkel

Feb 6 (Bloomberg) — Chinese Premier Wen Jiabao raised the prospect of contributing to the euro-area’s bailout programs, telling Chancellor Angela Merkel that China may be prepared to assist in resolving its debt crisis.

The Chinese government is considering funding options for the temporary European Financial Stability Facility and its permanent successor, the European Stability Mechanism, through the International Monetary Fund to help stabilize the monetary union, Wen said yesterday after meeting Merkel in Beijing. China has previously said that it needs more detail on any plan to contribute funds to the euro area.

China is “investigating and evaluating ways, through the IMF, to be more deeply involved using the ESM and EFSF channels in solving the European debt issue,” Wen said at a briefing alongside Merkel, who arrived in China early yesterday on her fifth visit to the world’s most populous country as chancellor.

Evidence of real progress will be a statement like:
‘Draghi sees no evidence of any possible channel from ECB loans to the economy’

Bank liquidity is something like wheels on a car.
Without wheels the car won’t function, but neither are wheels alone enough to make it go.

Banks are public/private partnerships, with govt’s role being liquidity provider, as private capital in the first loss position prices risk. And with unlimited liquidity provision comes the necessity of full regulation and supervision of the asset/capital side.

In the US the unlimited liquidity provision comes mainly via FDIC insured deposits, supplemented by funding from the Fed. The Fed is the liquidity provider of last resort for its member banks, while at the same time it uses the banking system’s cost of funds as its instrument of monetary policy.

The euro zone hasn’t figured this out yet.
The liquidity provider of last resort is the ECB, as it’s the ‘issuer of the currency’, and as such not itself liquidity constrained. The member nations are like the US states, and are necessarily liquidity constrained, and therefore not ‘empowered’ to be liquidity providers of last resort to their member banks.

So in that sense, as the bank funding by the ECB grows, it’s all gravitating towards what all other nations have in place. The problem is the euro zone leaders don’t understand that aspect of banking, as evidenced by the way they are resisting the shift to ECB funding, and, in fact, working towards moving banks away from ECB funding.

Draghi Sees No Evidence ECB Loans Are Financing Economy Yet

By Jana Randow and Simone Meier

Jan 28 (Bloomberg) — “Do we know that actually this money is going to finance the real economy? We don’t have evidence of this kind yet,” ECB President Mario Draghi told Davos. “There is a lag. We will have to see.” “We know for sure we have avoided a major, major credit crunch, a major funding crisis,” he said today. “You have parts of the euro area where credit is more or less normal, but you have other parts where credit is seriously contracting.” “If you take 0.5 trillion euros and then you take off the reimbursement of other short-term facilities by the banking system in December, you get a figure of roughly 220 billion euros, which is exactly the amount of bank bonds that were to come due in this period of time,” he said.

So it could be that the creditors have agreed to swap their bonds for 30 year bonds with ‘half their face value’ but maybe also with about equal economic value, which can in theory be done if the coupon and quality of the new bonds is high enough.

But, again, seven months of negotiations shows it’s not all that easy to come to agreement, and also that for reasons probably not entirely disclosed the bond holders have substantial bargaining power.

Greece hopes for debt swap deal by end of week

Jan 26 (AP) — Greece is aiming to complete negotiations on its debt swap deal by the end of the week, the government’s spokesman said Wednesday, adding that the talks were at their “most delicate phase.” Charles Dallara, head of the Institute of International Finance will head back to Athens on Thursday for the negotiations on a bond swap, known as the Private Sector Involvement. Athens is trying to get its private creditors to swap their Greek government bonds for new ones with half their face value, thereby slicing some euro100 billion ($130 billion) off its debt. The new bonds would also push the repayment deadlines 20 to 30 years into the future.

The Fed Is Misleading Congress About Europe – US Business News Blog – CNBC

By Warren Mosler

The banking system can’t fund all the euro member nations under current regulatory restrictions, including capital requirements and diversification rules.

The 3 year variable rate funding from the ECB may have helped some banks with room on their balance sheets, but with general liquidity concerns, buy more national govt debt, but that would be a one time adjustment. Once the banking system is ‘topped off’ it only buys more national govt bonds to replace maturing issues, or to add to its balance sheet should its capital increase.

Italy Bond Auction Fails to Match Spain Success

By Valentina Za

Jan 25 (Reuters) — Italy’s three-year debt costs fell below 5 percent but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.

Italy raised the maximum planned amount of 4.75 billion euros at the auction but did not live up to market expectations raised by a Spanish tender on Thursday where Madrid raised 10 billion euros, twice the planned amount, at lower rates.

Both Italy and Spain are benefiting from half a trillion euros of cheap three-year funds the European Central Bank injected into the banking system in an unprecedented move last month. Investors, however, remain more cautious towards Rome in the light of its much larger refinancing needs.

“The auction metrics look robust on aggregate, although not as spectacular as yesterday’s Spanish supply,” said Michael Leister, a strategist at DZ Bank in Frankfurt.

Italian bonds rallied after domestic banks awash with ECB money snapped up Spain’s bonds on Thursday. The mixed results of the Italian sale tempered market enthusiasm and Italy’s 10-year yields rose back above 6.60 percent in the secondary market, after falling below 6.50 earlier in the session, to their lowest level in more than a month.

“This will serve to dampen some of the markets’ enthusiasm in the wake of yesterday’s Spanish auction … It doesn’t defeat the notion that the ECB extraordinary liquidity provisioning will support peripheral debt but it perhaps tempers expectations as to what degree these operations will support,” said Richard McGuire, a strategist at Rabobank in London.

LOWEST SINCE SEPTEMBER

Italy sold its November 2014 three-year benchmark bond at an average rate of 4.83 percent on Friday, down sharply from a yield of 5.62 yield at an auction just two weeks ago.

In a sign of improving funding conditions, this was the lowest yield at a three-year auction since September last year though fellow debt struggler Spain only had to pay 3.384 percent on three-year bonds on Thursday.

The bid-to-cover ratio fell to around 1.22, versus an already weak 1.36 ratio at the end-December sale, showing anemic demand for the paper. This time, however, Italy sold the top planned amount of its three-year benchmark.

Rome also sold debt due in July 2014 and August 2018.

The ECB’s liquidity boost, evident also at an Italian bill sale on Thursday where one-year yields more than halved, leaves Italy’s Treasury better placed to refinance some 90 billion euros of bonds maturing between February and April.

That is more than Spain aims to issue in medium and long-term maturities in the whole of 2012.

What analysts now describe as a challenging task may have been an impossible one at the end of November, when market fears of a financial collapse pushed Italy’s short-term debt costs towards 8 percent.

Under the leadership of a new technocrat government, Italy has embarked on a bold austerity push aimed at balancing the budget in 2013.

Analysts at Barclays Capital noted in a report that third-quarter budget data showed a decline in current expenditures for the first time ever, when excluding debt servicing costs.

But Prime Minister Mario Monti must now convince markets it can revive Italy’s ailing growth rate by overcoming entrenched resistance to its liberalization program.

Analysts warn that sentiment on the markets remains fragile with worries over a deal with private investors to voluntarily write down half of the value of their Greek debt lingering in the background.

“Looking beyond this one auction, the issuance challenge for Italy remains significant. Market pressures are most apparent in the 10-year sector of the curve which will face supply in two weeks time,” Citi analysts wrote in a research note.

Italy will sell five- and ten-year bonds at the end of January. On this longer maturities demand from foreign investors plays a bigger role but analysts say Italy would be able to shift only part of its funding burden to the short-term ahead of a second three-year liquidity tender at the end of February.

Email from JJ Lando, now at Nomura:

“THE LTRO DIDN’T DO ANYTHING. ALL THE MONEY WOUND UP AS DEPOSITS AT THE ECB” “QE DIDN’T DO ANYTHING. ALL THE MONEY BECAME EXCESS RESERVES BACK AT THE FED.”
(Apologies in advance to all who have heard me give this one ten times before)

1. Central Banks, whenever they buy any asset (eg lend eg grow balance sheet) create new reserves.

2. Commercial banks and people do NOT have the capacity to destroy those reserves. Once the Fed or ECB wires the money or creates that asset line item on its spreadsheet, there is an equal and offsetting liability on its spreadsheet called reserves. This spreadsheet cannot be broken.

3. All that commercial banks can do is lending, which moves some of those reserves from ‘excess’ to ‘required’ but they are still there.

4. Commercial Banks make this lending decision based upon regulatory capital and profit motives, not based upon reserves. They have a ‘captive audience’ in their Central Banks, who MUST create the necessary reserves (a floored amount) to prevent interest rates from going to infinity.

5. When a Central Bank does a lot of Balance Sheet expansion in a short time, it’s going to wind up as deposits/excess NO MATTER WHAT. If the Fed does 1T of QE, Banks don’t suddenly ‘find’ the regulatory capital to make 10T of loans. And even if they did, there would be the SAME AMOUNT OF TOTAL RESERVES.

6. Bank lending to a 0% risk weighted sovereign actually does NOTHING to diminish excess reserves.

7. Simplified Illustration: ECB does a very large unsterilized LTRO. They take a lot of sov paper on balance sheet (temporarily), and they wire NEW FUNDS to thie member banks. Those member banks take some of the money and buy paper from the ITalian government. That government spends the money by wiring it to its pensioners. Those pensioners take it to buy food from the local grocer. The local grocer DEPOSITS IT IN HIS BANK. SOMEWHERE DOWN THE CHAIN the money winds up on deposit in some member bank, be the chain long or short. WHATEVER MONEY THE ECB CREATES WINDS UP ON DEPOSIT IN ITS MEMBER BANKS, WHETHER OR NOT IT IS ‘USED’ TO BUY SOVEREIGN DEBT, ‘USED’ TO MAKE LOANS, OR NOT USED AT ALL.

8. Please. I never wish to read again that ‘Central Bank money went unused because it wound up as deposits.’ IT HAS NO WHERE ELSE TO GO. THE BANKING SYSTEM IS A CLOSED LOOP. With the possible exception of someone making a withdrawal, taking the paper, and making a bonfire (actually not feasible in the hundreds of billions anyway bec there are constraints)

9. And that is probably how Italy just managed to borrow at 1.64%
Good luck!

My proposals remain:

1. A full FICA suspension:

The suspension of FICA paid by employees restores spending which supports output and employment.
The suspension of FICA paid by business helps keep costs down which in a competitive environment lowers prices for consumers.

2. $150 billion one time distribution by the federal govt to the states on a per capita basis to get them over the hump.

3. An $8/hr federally funded transition job for anyone willing and able to work to assist in the transition from unemployment to private sector employment.

Call me an inflation hawk if you want. But when the fiscal drag is removed with the FICA suspension and funds for the states I see risk of what will be seen as ‘unwelcome inflation’ causing Congress to put on the brakes long before unemployment gets below 5% without the $8/hr transition job in place, even with the help of the FICA suspension in lowering costs for business.

It’s my take that in an expansion the ‘employed labor buffer stock’ created by the $8/hr job offer will prove a superior price anchor to the current practice of using the current unemployment based buffer stock as our price anchor.

The federal government caused this mess for allowing changing credit conditions to cause its resulting over taxation to unemploy a lot more people than the government wanted to employ. So now the corrective policy is to suspend the FICA taxes, give the states the one time assistance they need to get over the hump the federal government policy created, and provide the transition job to help get those people that federal policy is causing to be unemployed back into private sector employment in a more orderly, more ‘non inflationary’ manner.

I’ve noticed the criticism the $8/hr proposal- aka the ‘Job Guarantee’- has been getting in the blogosphere, and it continues to be the case that none of it seems logically consistent to me, as seen from an MMT perspective. It seems the critics haven’t fully grasped the ramifications of the recognition of the currency as a (simple) public monopoly as outlined in Full Employment AND Price Stability and the other mandatory readings.

So yes, we can simply restore aggregate demand with the FICA suspension and funds for the states, but if I were running things I’d include the $8 transition job to improve the odds of both higher levels of real output and lower ‘inflation pressures’.

Also, this is not to say that I don’t support the funding of public infrastructure (broadly defined) for public purpose. In fact, I see that as THE reason for government in the first place, and it should be determined and fully funded as needed. I call that the ‘right size’ government, and, in general, it’s not the place for cyclical adjustments.

4. An energy policy to help keep energy consumption down as we expand GDP, particularly with regard to crude oil products.

Here my presumption is there’s more to life than burning our way to prosperity, with ‘whoever burns the most fuel wins.’

Perhaps more important than what happens if these proposals are followed is what happens if they are not, which is more likely going to be the case.

First, given current credit conditions, world demand, and the 0 rate policy and QE, it looks to me like the current federal deficit isn’t going to be large enough to allow anything better than muddling through we’ve seen over the last few years.

Second, potential volatility is as high as it’s ever been. Europe could muddle through with the ECB doing what it takes at the last minute to prevent a collapse, or doing what it takes proactively, or it could miss a beat and let it all unravel. Oil prices could double near term if Iran cuts production faster than the Saudis can replace it, or prices could collapse in time as production comes online from Iraq, the US, and other places forcing the Saudis to cut to levels where they can’t cut any more, and lose control of prices on the downside.

In other words, the risk of disruption and the range of outcomes remains elevated.

For the coming year I’ll be watching to see if the ECB buys bonds
only on rate spikes to keep them from rising further,
or on a continuous basis regardless of yields.

I suspect the former.

It’s the difference between watering a flower only as it’s about to die,
or on a regular basis to keep it continuously perky.

As if QE is an inflationary bias.
They are all clueless.

MMT to the ECB:
QE addresses the solvency issue, not ‘deflation’ or aggregate demand issues.

Bini Smaghi Says ECB Should Use QE If Deflation Risk Arises

By Gabi Thesing

Dec 23 (Bloomberg) — European Central Bank Executive Board member Lorenzo Bini Smaghi said that policy makers shouldn’t shirk from using quantitative easing if deflation becomes a danger to the euro region.

“I do not understand the quasi-religious discussions about quantitative easing,” Bini Smaghi, who will leave his post at the end of the month, said in an interview published yesterday by the Financial Times. The ECB confirmed the comments. “It is appropriate if economic conditions justify it, in particular in countries facing a liquidity trap that may lead to deflation.”

When it comes to CB liquidity operations, as previously discussed, it’s about price- interest rates- and not quantities of funds. In other words, the LTRO is an ECB tool that assists in setting the term structure of euro interest rates. It helps the ECB set the term cost of funds for its banking system, with that cost being passed through to the economy on a risk adjusted basis, with the banking system continuing to price risk.

So what does locking in their funds via LTRO do for most banks? Not much. Helps keep interest rate risk off the table, but they’ve always had other ways of doing that. It takes away some liquidity risk, but not much, as the banks haven’t been euro liquidity constrained. And banks still have the same constraints due to capital and associated risks.

To it’s credit, the ECB has been pretty good on the liquidity front all along. I’d give it an A grade for liquidity vs the Fed where I’d give a D grade for liquidity. Back in 2008 the ECB was quick to provide unlimited euro liquidity to its member banks, while the Fed dragged its feet for months before expanding its programs sufficiently to ensure its member banks dollar liquidity. And the FDIC did the unthinkable, closing WAMU for liquidity rather than for capital and asset reasons.

But while liquidity is a necessary condition for banking and the economy under current institutional arrangements, and while aggregate demand would further retreat if the CB failed to support bank liquidity, liquidity provision per se doesn’t add to aggregate demand.

What’s needed to restore output and employment is an increase in net spending, either public or private. And that choice is more political than economic.

Public sector spending can be increased by simply budgeting and spending. Private sector spending can be supported by cutting taxes to enhance income and/or somehow providing for the expansion of private sector debt.

Unfortunately current euro zone institutional structure is working against both of these channels to increased aggregate demand, as previously discussed.

And even in the US, where both channels are, operationally, wide open, it looks like FICA taxes are going to be allowed to rise at year end and work against aggregate demand, when the ‘right’ answer is to suspend it entirely.

Reads to me like PSI discussion might come back after a firewall and bank recap is in place?

FT: And the fifth answer is that the idea of introducing private sector involvement (PSI) in eurozone bail-outs was, in retrospect, a mistake?

Mario Draghi: The ideal sequencing would have been to first have a firewall in place, then do the recapitalization of the banks, and only afterwards decide whether you need to have PSI. This would have allowed managing stressed sovereign conditions in an orderly way. This was not done. Neither the EFSF was in place, nor were banks recapitalized, before people started suggesting PSI. It was like letting a bank fail without having a proper mechanism for managing this failure, as it had happened with Lehman.

The talk is that the new ECB longer term euro funding policy will mean euro member banks will suddenly start buying member nation euro debt and thereby ease the funding issue.

That doesn’t make sense to me. I see the 20 billion euro/wk bond purchases as possibly being enough to stabilize things, but not this.

Here’s my take:

So even if a bank officer now wants to buy, say, Italian debt out to 3 years because he can get ECB funding for that term, he probably has to go to an investment committee, so it is unlikely to happen overnight.

And the investment committees go something like this.

Investment officer:

‘now that we can get 3 year term funding from the ECB, i recommend we add to our italian debt position and make a 3% spread, which is a 30% return on equity’

committee responses:

‘why does the availability of term funding alter our current policy of reducing holdings to reduce credit risk?
what are the regulatory limits?
will the regulators allow us to own more?
what about the risk of downgrade which could force a sale?
what about repo haircuts if prices fall?
what if it’s decided Italy is unsustainable and the euro ministers vote on private sector haircuts?
how will taking on this risk affect our ability to raise capital?’

etc.

While banks may indeed buy more euro member nation debt due to the availability of the new term funding, I don’t think that new funding is enough to cause them to make that decision.

I do think the term funding will be used by banks with problems obtaining term funding to lock in the term cost of funds.

It’s supports the notion that they understand that for govt debt to go down with the current institutional structure they need private sector debt (and/or exports) to increase.

However with the private sector necessarily pro cyclical (which is what Minsky boils down to),
at best this policy will keep mainly keep things from getting worse than otherwise.

ECB Wants New Capital Rules Amid Credit Crunch Fears

December 15 (MNI) — The European Central Bank, fearful of a looming credit crunch, is pushing regulators to alter new recapitalization rules in a way that will dissuade banks from shrinking their balance sheets to reach the 9% core tier 1 ratio required by the middle of next year, well-placed Eurosystem sources told Market News International.

In late October, the European Banking Authority (EBA) said it was requiring the region’s biggest banks to establish an exceptional and temporary buffer: the ratio of their highest quality capital to the assets on their balance sheet, weighted for risk, must reach 9% by the end of June 2012.

Eurosystem central bank officials as well as some EU governments are concerned that this new capital requirement could lead to a massive deleveraging by banks in Europe, which would entail selling off assets and significantly tightening conditions for lending.

There is widespread fear that such a development would depress loans to households and businesses. Some say it is already partly to blame for the big selloff in sovereign government bonds last month that led to sharply higher borrowing costs for Italy and Spain.

The original idea behind the EBA directive was that banks would need to maintain a constant 9% ratio over the entire period during which the requirement was in force. They could do so either by raising new capital — a big challenge in current market conditions — or by dumping assets and not acquiring new ones, which turned out to be the easier route.

“If you combine [asset] disposals with an aggressive fiscal tightening, you are creating the conditions for a sharp contraction,” a Eurozone central banker warned. He projected that the combined hit on GDP from fiscal tightening and bank retrenchment could be as much as two full percentage points. “That means a recession next year,” he said.

In recent public comments, ECB President Mario Draghi expressed concern about the potentially pernicious impact of bank deleveraging to meet the new capital targets. “We want to make absolutely sure that this process does not aggravate the credit tightening that is going on now,” the ECB president said. “It is important that banks raise capital, but not in a way that affects lending.”

Sources said that under a new proposal intended to address this problem, banks would be required not to reach a 9% ratio but to raise a specified, fixed amount of capital by the mid-2012 deadline.

Based on figures banks provided to the EBA as of end-September, the regulators would calculate the amount of capital a bank would have needed to hit the 9% capital ratio at that time. Banks would then be required to raise that level of capital regardless of what they had done with their assets since then or what they might do with them in the future.

Because banks would be required to raise the same amount of core tier one capital regardless of subsequent balance sheet moves, they would no longer have the same incentive to dump assets as a means of meeting the capital requirement.

A senior EU source said that a recent letter from the chairman of the EBA and the Polish EU presidency had noted that bank deleveraging was hurting the recovery, and it laid out a plan by which the 9% ratio would be calculated on the basis of risk-weighted assets on banks’ books as of September 30.

If the plan is approved, “you won’t see a change to the actual ratios or the sums [to be raised], but there will be a clarification that this should not be achieved through asset disposal,” this source said. “It should slow the aggressive [asset] disposal, which many people think is killing any chance of an upswing.”

After releasing new figures last Thursday on the total capital shortfall of European banks, totaling E114.7 billion, the EBA told banks to raise the money from investors, retained earnings and lower bonuses. Banks may only sell assets if the disposals do not limit overall lending to the economy, the EBA said.

However, it is not clear how bank regulators and supervisors would enforce this and whether there would be a level playing field, a well-placed Eurosystem source said. A new EBA requirement of the type now being discussed could address this issue, he said.

The decision on whether to switch from a capital ratio to a fixed amount of capital that each bank must raise lies in the hands of supervisors and regulators. It is too early to tell whether regulators will adopt the recommendation, since deliberations are still going on, another Eurosystem source said.

In its own effort to ensure the Eurozone’s economy won’t be starved for credit, the ECB last week announced a radical set of new liquidity measures, including a looser collateral framework and refinancing operations with a maturity of three years.

While not my first choice for public policy,
the 20 billion euro ECB bond buying isn’t nothing.
It’s something over $1.3 trillion per year at current exchange rates.

At the macro level it sort of funds the entire euro zone deficit spending.
And deficits are currently reasonable high.

So, even while recognizing that timing is everything,
the solvency issue could be in the process of stabilizing as the various ‘new’
‘E’ funding proposals and IMF come closer to fruition.

Not that the euro economy will boom anytime soon
as austerity measures take their toll,
but that ‘leg 2′ of the relief rally could be in progress.

*ECB SAID TO CONSIDER TWO-YEAR LOANS FOR BANKS
*ECB SAID TO LOOK AT ALLOWING MORE UNCOVERED BONDS AS COLLATERAL
*ECB SAID TO PLAN LOOSENING

Meanwhile the ECB continues to look at liquidity enhancement to try to get a private sector credit expansion
going.

Good luck to them. It’s not about liquidity. It’s about private sector lending being pro cyclical.

yes, it will keep a lid on dollar libor so bma ratios aren’t so much of a blowup trade from that aspect anymore.

And the lower rate could mean most all dollar funding in the eurozone goes this route which could be both a political problem for the US and a financial issue if it all goes bad and the ECB should somehow cease to exist. The ECB is a ‘shell company’ with a bit of gold and no member nation guarantees.

Also, if I were a US bank regulator seems I wouldn’t let member US banks invest FDIC funds in any euro member nation debt and/or related securities. I might not even allow lending to corporations with exposure that could interfere with their ability to service their loans. Regulators do this via increasing risk weights accordingly.

The US regulators have a fiduciary responsibility to US tax payers and if I were one of them I’d act accordingly unless specifically told otherwise by Congress.

Subject: Huge allotment at ECB 84days USD operation:

 
sizeable USD allotment at ECB 84-day $ operation: $50.685Bn at 59bps.
The total number of banks participating was 34.
With the halving in cost, the facility provided much cheaper than market x-ccy basis levels, clarly all the chatter around the stigma attached to the use of the line was inaccurate to say the least!

My takeaway from two days in DC is that Europe is headed to a blood in the streets outcome.

While ECB funding remains ongoing even as it’s uncertain,
in any case the underlying theme remains austerity.

There is no plan B.
Just keep raising taxes and cutting spending even as
those actions work to cause deficits to go higher rather than lower.

So while the solvency and funding issue is likely to be resolved,
the relief rally won’t last long as the funding will continue to be
conditional to ongoing austerity and negative growth.
And the austerity looks likely to not only continue but also to intensify,
even as the euro zone has already slipped into recession.

So from what I can see,
there’s no chance that the ECB would fund and at the same time mandate the
higher deficts needed for a recovery,
In which case the only thing that will end the austerity is
blood on the streets in sufficent quantity to trigger chaos and a change in governance.

Just looks like the Fed lowered the rate on its swap lines to keep libor down, which had been moving up to its prior swap line rate.

No big deal, apart from the fact the Fed shouldn’t be allowed to lend on an unsecured basis like this without explicit approval of congress.

Lending unsecured on an unlimited basis has the potential to be highly inflationary.

With the currency a public monopoly, the price level is necessarily a function of prices paid at the point of govt spending and or collateral demanded when govt lends.

Allowing unlimited unsecured lending has the potential to vaporize the currency. And while in this case that kind of abuse isn’t likely, the potential is there.

Still no default…

As a matter of chance, the euro’s lucky stars fall in line with the latest IMF musings.

Perhaps most important,
operationally,
the ECB lending to the IMF,
which then lends to euro member nations,
doesn’t count as ‘printing money’ in the Teutonic monetary bible.

To recap:

When the ECB buys bonds,
it credits member bank accounts on the ECB’s spreadsheet.
Those accounts count as ‘money’ while the bonds did not count as ‘money’
So this is said to be ‘printing money’

The ECB then offers different euro accounts,
also data on the same ECB spreadsheet,
that pay interest with relatively short maturities.
This is called ‘sterilization’ because those deposits don’t count as ‘money’

However, when the ECB buys SDR from the IMF loans to the IMF,
and it credits the IMF account at the ECB with euro,
that doesn’t count as ‘printing money.’

Nor does the IMF lending those euro to the likes of Italy count as ‘printing money’

And, while a bit of a stretch,
the IMF was, after all, set up to address balance of payments issues.
And while overall the euro zone doesn’t have a balance of payments issue of any consequence,
it’s not wrong to say the euro nations in question
do have balance of payments issues.
So here’s one place in the world of floating exchange rates between nations
where IMF involvement can be said to actually fit its original mandate.

Furthermore, if there’s one force that can be trusted to impose austerity,
it’s the IMF, of course.

Also interesting is that the IMF takes the credit risk for the loans it makes,
while the ECB takes IMF credit risk on its balance sheet.
This means the rest of world is assuming the risk for the loans to the national govts.

Lastly, while it triggers a massive relief rally,
it’s just Bigfoot kicking the can way down the road,
as the austerity continues to weaken the euro economy,
now to the point of driving up deficits as GDP growth goes negative.

So bringing in the IMF helps Germany preserve it’s ‘max austerity’ image,
kicks the solvency issue down the road,
and all without the ECB ‘printing money’!

So now let’s see if it actually happens.

Merry Christmas!