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Things Not As Bad As They Seem?
Dec. 22nd, 2011 11:53 pmExcuse me while I continue not to post on something I sort of know how to think about — music — and instead post again on what other people are saying about the European economy. Krugman links a piece by fellow NY Times writer Floyd Norris in which Norris argues that the European Central Bank has figured out a way to get European bonds bought without seeming to be the one that is doing so. If I'm getting this right (and why should I be?) the ECB is loaning money to banks at piddling rates so that, e.g, Italian banks can turn around and at a nice profit buy Italian bonds, and Spanish banks can turn around and buy Spanish bonds. So, while declaring adamantly that it's not buying bonds, the ECB is in effect subsidizing the bond purchases. Norris:
There is no limit on what the banks can do with the money. But there is an obvious, virtually risk-free, option. A bank can buy short-term securities of its own government and pocket the difference — up to four or five percentage points — for the life of the securities.
...
What can go wrong for a bank that follows that course? The obvious one is that the governments default. But for a Spanish bank owning Spanish bonds, or an Italian one with bonds from its government, that is really not a risk worth worrying about. They would be dead whether or not they had bought more bonds.
This still may not be enough to save the EU, and it won't stop [what Krugman insists daily are] Europe's self-defeating austerity policies; but Norris believes it gives Europe several years. So if Norris is right, we're not facing the collapse that seemed imminent last time I posted.
( Krugman thinks Norris's analysis seems good, but also thinks that this action in itself won't be enough to save Europe, and Norris thinks the same thing )
There is no limit on what the banks can do with the money. But there is an obvious, virtually risk-free, option. A bank can buy short-term securities of its own government and pocket the difference — up to four or five percentage points — for the life of the securities.
...
What can go wrong for a bank that follows that course? The obvious one is that the governments default. But for a Spanish bank owning Spanish bonds, or an Italian one with bonds from its government, that is really not a risk worth worrying about. They would be dead whether or not they had bought more bonds.
This still may not be enough to save the EU, and it won't stop [what Krugman insists daily are] Europe's self-defeating austerity policies; but Norris believes it gives Europe several years. So if Norris is right, we're not facing the collapse that seemed imminent last time I posted.
( Krugman thinks Norris's analysis seems good, but also thinks that this action in itself won't be enough to save Europe, and Norris thinks the same thing )
