Project Syndicate writer, Hans-Werner Sinn, explains why the ECB’s asset purchases and Target2 imbalances constitute “Europe’s Secret Bailout”.
Under the ECB’s QE program, which started in March 2015, eurozone members’ central banks buy private market securities for €1.74 trillion ($1.84 trillion), with more than €1.4 trillion to be used to purchase their own countries’ government debt.
The QE program seems to be symmetrical because each central bank repurchases its own government debt in proportion to the size of the country. But it does not have a symmetrical effect, because government debt from southern European countries, where the debt binges and current-account deficits of the past occurred, are mostly repurchased abroad.
For example, the Banco de España repurchases Spanish government bonds from all over the world, thereby deleveraging the country vis-à-vis private creditors. To this end, it asks other eurozone members’ central banks, particularly the German Bundesbank and, in some cases, the Dutch central bank, to credit the payment orders to the German and Dutch bond sellers. Frequently, if the sellers of Spanish government bonds are outside the eurozone, it will ask the ECB to credit the payment orders.
In the latter case, this often results in triangular transactions, with the sellers transferring the money to Germany or the Netherlands to invest it in fixed-interest securities, companies, or company shares. Thus, the German Bundesbank and the Dutch central bank must credit not only the direct payment orders from Spain but also the indirect orders resulting from the Banca de España’s repurchases in third countries.
The payment order credits granted by the Bundesbank and the Dutch central bank are recorded as Target claims against the euro system.
For the GIPS countries [Greece, Italy, Portugal, and Spain], these transactions are a splendid deal. They can exchange interest-bearing government debt with fixed maturities held by private investors for the (currently) non-interest-bearing and never-payable Target book debt of their central banks – institutions that the Maastricht Treaty defines as limited liability companies because member states do not have to recapitalize them when they are over-indebted.
If a crash occurs and those countries leave the euro, their national central banks are likely to go bankrupt because much of their debt is denominated in euro, whereas their claims against the respective states and the banks will be converted to the new depreciating currency. The Target claims of the remaining euro system will then vanish into thin air, and the Bundesbank and the Dutch central bank will only be able to hope that other surviving central banks participate in their losses. At that time, German and Dutch asset sellers who now hold central bank money will notice that their stocks are claims against their central banks that are no longer covered.
One should not assume that anyone is actively striving for a crash. But, in view of the negotiations – set to begin in 2018 – on a European fiscal union (implying systematic transfers from the EU’s north to its south), it wouldn’t hurt if Germany and the Netherlands knew what would happen if they did not sign a possible treaty. As it stands, they will presumably agree to a fiscal union, if only because it will enable them to hide the expected write-off losses in a European transfer union, rather than disclosing those losses now.
Target2 Answer
I had been struggling to understand the precise relationship between Target2 liabilities, including those within the ECB itself, and the ECB’s QE program. The above explanation appears to provide the answer.
Regardless, euro-denominated debts that cannot possibly be paid back keep piling up.
Target2 Liabilities
If Greece were to leave the Eurozone and pay back its debts in Drachmas, either the ECB would have to print €71.0 billion to cover the default, or the other eurozone nations would have to split the bill based on their percentage weight in the EMU.
If Italy left the eurozone, the shared liability would be €386.1 billion.
Responsibility Percentages
That table refers to ESM commitments. Percentage responsibilities apply should there be a default.
What If?
If Italy were to default, its 17.9% would have to be redistributed proportionally to the other countries or the ECB would have to violate its treaty and print the euros.
My conclusion is not the same as Hans-Werner Sinn who concludes “As it stands, they [Germany and the Netherlands] will presumably agree to a fiscal union, if only because it will enable them to hide the expected write-off losses in a European transfer union, rather than disclosing those losses now.”
I strongly suspect the ECB would violate the treaty agreements and print euros to cover a default. Germany and the Netherlands would go along.
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Mike “Mish” Shedlock
“I strongly suspect the ECB would violate the treaty agreements and print euros to cover a default.”
Of course they would. Since when do Treaty Rules mean anything?
Eurozone Debt-to-GDP ratios were supposed to never exceed 65% and annual fiscal deficits were never to exceed 3%.
Now they are referring to fiscal deficits GREATER THAN 3% as “austerity”.
“Treaty Rules?….We don’t need no steeeenkin’ Treaty Rules!”
The ECB will just finance Greek debt at 0% repo in perpetuity … which is completely illegal under both ECB and EU guidelines (are they really laws? no one obeys them)
This is what they are currently doing. Its what they will continue to do until the ECB collapses, which is a question of when, not if.
No defaults. No bailouts. No obeying treaties. No one goes to jail. No one is accountable for anything. Just stick your fingers in your ears, stomp your feet, scream “No, no, no, no, no, no.” and threaten to hold your breath until mommy buys the EU an ice cream.
EU Treaties are barely guidelines, it doesn’t matter what they say.
Agree it is a no brainer since not an issue to break the rules when it is in the best interest of all the main players.
The analysis misses the relevance of money supply to an eventual breakdown of the system. see here: http://www.tradingeconomics.com/euro-area/money-supply-m3
(click the ten year tab.
monetary economists claim that inflation is a monetary phenomenom. if that were the case, where has the impact on inflation of a 50% increase in M3 money supply gone to?
in fact, if you look at the narrow money measure of M1, you will see: “The annual growth rate of the narrower aggregate M1, which includes currency in circulation and overnight deposits, stood at 8.4% in February, unchanged from the previous month.”
that taken from here: http://www.ecb.europa.eu/press/pdf/md/md1702.pdf
in classical economics, money supply numbers – compared to economic growth outturns – are indicative of an economy in trouble, and a heartbeat from monetary aggregate inflation turning into general inflation – combined with the low economic growth (circa 2% tops) – stagflation of 6%.
this is demonstrated by the youth unemployment in europe (25% in Paris, 50% in Greece, SPain and Italy). incidentally, why is Ireland not included as one of the PIGS? its aggregates are totally meaningless as it has fallen into the trap of thinking that not paying tax is a viable business/economic strategy.
for me, this simply underlines the irrelevance of central banks to outturns in inflation, growth or unemployment. the sooner central banks are relieved of the resposnsibility of their balance sheets, the better off the whole of manking will be. giving a bunch of pensil heads control of trillions of dollars printed out of thin air is the stupidest thing that any democracy has ever conceived.
You cannot look at Money Supply growth alone.
You must also consider Monetary Velocity.
The increase in Money Supply has been completely offset by the collapse in Monetary Velocity to a multi-decade low.
That is why inflation has been largely contained – with the exception of asset prices and those items for which abundant credit is easily available.
in the world of economic theory you are 100% right: but that’s the point.
money velocity or In other words, the number of times one unit of money is spent to buy goods and services per unit of time is ONE important indicator.
Howver, there is no economic theory that can explain QE/ZIRP/NIRP, either from a classical or financial monetary theory. It never existed priot to 2007 and, much like physics at the center of a black hole, none of its consequences have been or can be predicted, explained or modeled.
This makes ECB “control” a ludicrous argument.
Although not as good a metric as MV, how fast is physical cash – the notes and coins of M0 being circulated in Europe now, compared to ten years ago. Given we have seen an era spanning a GFC plus a “crisis” in the Eurozone and a current “crisis” in Italian/Spanishthe failure of Greek/Irish/Dutch/British banks?
I doubt anyone knows or can measure that circulation of money that may or may not be used to purchase goods and services with any greater or lesser frequency over a decade.
Add in time and sight deposits to M0 get to M3 and perhaps it is possible to differentiate, interpret and model the EU economy (beyond, for example, a propensity to switch money every three months across the Eurozone banks ten years ago compared to placing overnight deposits in athens, madrid or warsaw. that makes “money velocity somewhere between 365 and 4 on a calendar time basis
You would also need to make the argument that it is possible to differentiate between the amount and time taken for voluntary (real activity in goods and services) and involuntary money circulation for goods and servcies OR money (either because of regulatory oversight or because of central bank intervention or because of the target2 mechanism).
Point is, the ECB has no control over either goods and services being produced, the quality of those goods and services, not the number of people employed to make those goods and services. The ECB (along with the Fed, the BoJ, the BoC and the BoE are irrelevant to any countries economy, beyond printing physical notes and coins. Perhaps in digital format, but preferably (for me anyway) in physical bank notes.
Velocity is just a synthetic construct with no independent means of measuring at all. It’s just nominal GDP divided by the money supply. So of course increasing the money supply lower velocity.
Lots of Newspeak works this way: Appropriate words that has some fairy widespread intuitive connotation. And then define them technically in manner maximally open to manipulation.
Also, inflation being “largely contained – with the exception of asset prices”, is about as relevant as weight gain being “largely contained – with the exception of around the waistline.”
You have a valid mathematical point using something like the following equation.
M*v=Real GDP*P
But, money supply level and growth are both roughly exponential in time. Velocity moves back and forth in a band in an economy like the US where nothing wild like hyper-dillution is going on. Any thing that goes up x% per year is an exponential growth.
Now actually v is not measured but derived. And it is different depending if it is velocity of M0, M1, or M2 money.
v=Nominal GDP/ {M0,M1,M2}
But using calculus I think M*v is units of money/time thus it could be dM/dt. That would be a rate of spending which would also include a rate of money growth spent into circulation. v is a frequency or 1/time.
This house of cards has legs in it yet with the complicit help of governments and banks working together. Once we move to digital currency it will get even easier since the house will be electronic and imaginary. Virtual reality economy so to speak.
I wonder if ‘our’ Fed has ‘helped out’ any of Europe’s financial institutions.
ie all those missing billions of dollars via the NY Fed.
Bernanke did a ***MASSIVE*** (trillions) EURUSD swap deal between “his” Fed and the ECB. He left office without paying it back, or closing the swap (getting the money back) from the ECB. The man now collects $200K bribes… um, speaking fees.
Ist round coverage of France election live. 97% reporting:
http://graphics.france24.com/results-first-round-french-presidential-election-2017/
I listened to Macron speak after the results. He was very smart about things. Clearly targeted at getting the support of the candidates that lost today.
What a coincidence given he hasn’t a seat in assembly, not even his own as his party is an unregistered below board spin-off. You would think that promising everything but the far right to everyone would be a give-away but obviously not. Lets call it MPT, the magic policy tree.. errr what does he stand for again? Just don’t mention black and pope in the same sentence, somos mas Maduro que esto tio mio.
…and the people cheer and cry and think their lives will be changed… all green lights ahead of us. Sad.
i didn’t know that his wife was 24 years older than he is. he will win the second round for sure, but i can’t help but feel that he is a “toy boy banker” type with no particular ability or experience. as south park portrayed, the choice seems to be always between a douche and a turd sandwich.
Some call her his beard, but putting low speculation aside as as unworthy as its subject, it would take some clear revelation to upset his lead. Seeing as his backers own the press, and now via allied politicians the institutions, it is hard to imagine what would ruin his presentation… and even if it did there would likely be a repeat 1st round. It is likely to be a very confused legislature… assembly elections in June…a mixed cabinet… a quarter of the population at least will strongly dislike him… I don’t think it will be a very productive recipe, to say the least.
“God laughs at creatures who deplore the effects of which they cherish their causes”.
The French woted Macron, a disguised Holland, like if 5 years of non sense had not been enough….
They want the young, the modern, the pro-German, the globalist, the open, the financial, but they will hate the effects this will produce, they will hate Macron, in less than a year.
Disappointment is unavoidable because, at the beginning, there is deception. Macron not only does not have a magic wand but his plan, his agenda are the opposite of what the people who will vote for him want. He wants to take them for a ride to the benefit of Germans and national and international finance promising them that tomorrow will be better.
Yesterday was clearly a globalist victory, showing the strength of propaganda. After Obama the establishment did it again, managing to put a puppet into power, to drive their agenda.
And even when they loose, such as brexit or trump election, they always manage to twist a few arms later to get it their way.
Very interesting times indeed!
Help me out here…Is there one eurozone country that is adhering to the Stability and Growth Pact…limiting government deficits to three percent of GDP and debt to 60% of GDP? These rules are coveniently disregarded for the sake of preventing system collapse…The ECB will do the same with Target 2 to prevent disaster…
+1
As long as the indoctrinati keeps clamoring to be kept safe from the entirely imaginary hobgoblin called “system collapse”, the charade can go on and on and on.
Only hard limit in sight, is that the ones designated as patsies in the European version of theft-by-bankster, are increasingly Muslim. Whose primary allegiance is hence to a Deity somewhat less obviously purely nonsensical, that the pagan Saint System.
QE to Infinity,,,,everywhere. Moral Hazard as a solution to crisis has been chosen. Can’t put the toothpaste back in the tube once it’s out.
This CB run world economy will go on for years before some miscalculation trips it up. Hell, maybe even decades.
Bankers will once again use the printing press to secretly confiscate people’s stuff, and give the loot to bankers. Bailout is just one of the many excuses bankers use to rationalize their actions.
do u ever say anything else?
Do they ever do anything else?
Last I heard ‘God’s work’ didn’t include usury, but then how could anyone deny a banker a slice of the advantage they sell?
Too bad for the rest, sure they are complicit as they use the notes also, though you forget maybe that they are obliged to by force unless they live some kind of parallel existence which is all the more susceptible to being fined somehow by those that have allocated ownership of ‘everything’, and hence become outlaws or lose their freedom.
Do you wonder where discontent starts?
I’ll leave you to provide me the math on that, to calculate the meaning, because after all, it all equates, doesn’t it? Nothing that dilating the money supply won’t satisfy, let me watch you catch your own tale this time.
🙂
Gods work… so they take rates to Jesus levels of 0% and instead of being happy, y’all complain even more. Jesus wants ZIRP. 🙂
What math on that… money is a hot potato asset. Meant for facilitating the transfer of other assets, not to be held as is, and easily avoided.
If one does not understand that, and take the necessary measures to avoid those easily avoidable consequences, I cannot defend the desire to believe an asset should be what it is not. Particularly complained about by the very people that acknowledge it is not what they want to believe it should be.
I never bother to expend energy trying to change what is, I spent my energy accepting what is and playing the game presented me.
Divers weights, and divers measures, both of them are alike abomination to the LORD. Proverbs 20:10 KJV
I think Mish (and this project propaganda writer) both need to be a lot more careful with their word choice.
Angela Merkel might opt to bail out the EU/ECB. She already tried to once, and was rebuffed by the German high court. I remember Mish writing a rather anti-German post several years ago about red cardinals making pronouncements (the German high court judges dress in red robes for historical reasons — just as silly as the wigs the Brits like to wear). The German high court ruled that Germany cannot be held responsible for more than EUR170 billion in losses, and Angela Merkel would be in contempt if she attempted to increase that limit without explicit authorization from the Bundestag (which didn’t happen and is not likely to ever).
Merkel wanting to bail out the EU, and Germany wanting to bail out the EU — two completely different things.
Just because John McCain wants to start a war with everyone on Earth does not mean that Mish agrees with McCain. Ditto when Obama wanted to start a war in Syria, ditto when Trump fired missiles in.
Germany isn’t going to bail out the EU/ECB, even if Merkel wants to. She probably does want to, already tried, and already got shot down in court.
As many other commenters have already pointed out — the EU’s treaties that govern how losses should be divided are irrelevant. NO ONE in the EU has obeyed any treaties so far, and no politician running a massive deficit (aka all of them) is going to cut domestic spending to give billions to Brussels. Read my lips, kiss my intern down there, WMD, keep your doctor — whatever stupid lie comes out of whatever politicians mouth, no EU member state is going to pay.
If any of them were going to pay, it would have happened already. if any of them were going to keep to their treaty obligations, it would have happened already.
When the Greek GOVERNMENT defaults, it will not pay (that’s why they call it default). The greek people are able to pay, but they didn’t agree to Athens much less Brussels — its not their debt.
The EU lacks democratic legitimacy, and so does the EU’s debts.
I agree, but I don’t think you visualise the trap here. The 800 bn or so surplus that Germany ‘owns’ is the similar amount owed by other nations and the ECB within Eurozone. While the Euro remains currency and all the accounting passes via the ECB, it makes sense or is valid. If Eurozone crumbles, or even a country with Target2 debt leaves, its REAL part of the equation dissapears subject to whatever kind of accord is or isn’t reached. Seriously, various countries, in a situation of chaos and resentment, might tell Germany to f. off, and deny any claims represented by Target 2. At that point Germany loses going on 800 bn, plus all trade with these countries, plus ends up with a populace up in arms. It is not a clever circumstance this ‘ no exit’ and financial political brinkmanship that is underway, especially as it is illegitimate and corrupt. Some say the break up of the somewhat similar LMU was a main precursor to WW1, for example – whether because it existed or failed ( due to cheating and corruption no less) is another matter.
That is why the route of bailout is being forwarded – they have left no other sane solution, probably purposefully.
Several clarifications needed:
1) **WHEN** the Euro collapses, not if… I have no idea of the timing – tomorrow, next month, next year, ??? but it is not sustainable and everyone knows it.
2) Of course the ECB assets “owned” by Germany are not money good. That proves they are going to take a big loss at some point (again, timing unknown)
3) While the EU doesn’t enforce much of anything, the German courts are bit more strict. NEIN!! means no, and they have ways of pounding this into even the thickest of skulls.
4) This entire discussion seems based on a bad assumption that Euros are wealth (they are not). Euros are just a way of keeping score. Food, machinery, shelter, transport, funny red robes for judges to prance around in … that is real wealth.
Euros will be lost. Wealth (both German beer steins and Greek olive trees) isn’t moving anywhere. The value of certain types of labor will become as worthless as euros or drachma.
Exactly the same outcome as every other sovereign default throughout history. This time will not be different
I would call Euros ( currently) access to real wealth, same difference maybe.
I question the ability of the German courts, there is Trichet’s proverbial ‘stealth’ at play. Let us imagine (so don’t be pedantic on anything on but the base assumption I am trying to describe) the ECB is run by Germany (and maybe it is) , and it has a bunch of nations that join its currency and accounting ( not far off as the initial pledges were treaty and paper base money share – the countries picked a rate to convert their pre-existing prices to). The German courts ( nor the ECB) do not have ultimate jurisdiction over those nations short of war or isolating them – this is the meaning of sovereignty. Now various governments and their economies screw up ( for whatever reason) . Does Germany ( or the ECB) say nein? No, they continue to arrange funding for these countries, while trying to tailor them ( into shape or for profit, of one kind or another, each has their view). What does that funding mean? It means the countries don’t hard default – that is they get bailed out. How do they get bailed out? By increasing the liability to Germany in the event of a default and exit from currency, as registered by Target2.
Remember nor Germany nor ECB has jurisdiction at that point, and yet you are saying the German courts won’t allow Germany to transfer
… 170 bn to other countries, to take 170 bn in losses. It already has transferred 800 bn and it has no way to secure against the loss of that amount. Germany sits on the board of governors of the ECB, it has not protested.
Tough.
Germany has the actual wealth, and the EU can’t get it short of war (with an army the EU doesn’t have). So the EU can’t do a thing.
You have a rock solid “EU law” claim that is unenforceable anywhere EU law does not apply — which is everywhere including within the EU. Within Germany, the German courts take precedence over EU suggestions. I think (not 100% certain) that German law actually does prevail in a legal sense — but I am certain that German law prevails in a practical sense.
The EU cannot enforce their own treaties. They don’t have an army at all, and the only member state army that can project power abroad is the one under Theresa May’s control.
You are probably correct that the ECB “owns” a claim for 800 billion trillion zillion whatever monopoly money. But if you have ever tried to pay your utility bill with monopoly money… it doesn’t work
It seems you do not cherish the French much which could explain the dissonance. The nation might be dying but so far french ability to project military power is internationaly recognised.
Here are a few stats to compare French and English army.
http://www.nationmaster.com/country-info/compare/France/United-Kingdom/Military
In all fairness, Paris is lovely this time of year.
Charles — you can sing vive la france all day. But when it comes to the actual real world, France needed help just to bomb Libya. That was the assessment of your dear leader Obama. It was the assessment of Monsieur Hollande. And it was the assessment of the Dutch NATO commander.
The French cannot project power into Algeria (they certainly try all the time, but fail). Not even the French government thought France could do anything in Libya. Two decades ago, everyone in NATO agreed the French mission to Serbia was nothing more than a blue helmeted target.
And this past year, your silly military has failed to secure Paris.
So yeah — France cannot project power abroad as I said before. I was being charitable: France can barely project power within Paris
I didn’t know Mish had a “project propaganda writer”. Could you please enlighten us a bit about his/her identity, and how you found out?
when Greek government eventually defaults. Much of The debt will convert into equity of Greek assets ( telekom, ports, utilities) at very favorable ratios to the bondholders.
Meanwhile, that other mockery of democracy — the UN — has decided to put Saudi Arabia on their Women’s Rights Council.
Same ridiculous organization that put Libya under Qadafi in charge of their human rights council.
And they have an actress with giant boobs (Angelina Jolie) in charge of clearing land mines in 3rd world countries… because pretending to be someone else is ideal training for disposing of unexploded ordinance. Its not quite as good training as wearing of vile of blood around your neck, but its close.
Its also the same group of mental cases that warned the world of an impending new Ice Age in the 1970s, only to panic 20 years later about global warming — and so far they haven’t provided any scientific evidence to support panic in either direction. Just lots of politics and screaming.
Just like the employees at the EU, the unelected folks at the UN like to take 2-3 hour lunches at five star restaurants while their limos double park.
Whoa, my head is spinning after reading this. Since it’s too complicated to understand reading the first time, it is automatically a bad idea.
“I strongly suspect the ECB would violate the treaty agreements and print euros to cover a default. Germany and the Netherlands would go along.”
…
Absolutely
Seriously, at this point in time is that even a debatable point?
The question moves to valuation of euro vs usd in the aftermath. I long thought parity, but with years of basically no constraint on the fiscal side … the euro might have to trade much lower.
euro = $.75?
Maybe Germany just can draw on their 800B it at the ECB? The ECB can print and deliver.