Targeting the ECB’s “stealth bailout”
Slate’s Moneybox takes issue with the ECB’s “stealth bailout” of Italy:
Basically, as an alternative to directly guaranteeing the Italian government affordable loans the ECB is guaranteeing super-cheap loans to European banks. The banks are then able to plow that money into government debt at a profit and the strong demand for government debt assures that borrowing costs fall. [….] The whole thing is incredibly slimey and I have to suspect that it will end poorly, but for the time being at least it’s working.
Of course, not only are the Fed and BoE using exactly the same mechanism in the US and UK, by providing banks collateralised funding nearly for free (albeit at shorter tenors), they also add a big dollop of QE on top. Primary dealers in government debt are being encouraged to buy bonds from the Treasury, which the central banks then buy back at a higher price. Result, governments are funded, yields go down, banks make profits and are thus able to recapitalise.
In fact, the above was a stated objective of QE when it started in 2009. The ECB was never able to do this due to German opposition, at least until the agreement on deeper fiscal union in December last year. With that in place, this intervention by the ECB was to be expected and it is merely playing catch-up with the US and UK.
