Things Not As Bad As They Seem?
Dec. 22nd, 2011 11:53 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
koganbotExcuse 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.
Norris does end on a pessimistic note:
In the short run, Mr. Draghi has avoided disaster. In the longer run, it is hard to see a course that enables the peripheral countries to regain prosperity and competitiveness while keeping the single currency.
Krugman seems to accept Norris's analysis of the ECB's moves:
Regular readers may recall that I and others were adamant that it was essential for the ECB to step in and buy the debt of troubled governments, to head off what looked very much like self-fulfilling panic. The ECB refused to do that, and many of us took that refusal at face value — but the argument is that in reality it did the functional equivalent, lending very large sums to banks with sovereign debt as collateral, so that it was in effect doing the purchases we wanted, but laundering those purchases through banks.
But of course he thinks Norris isn't pessimistic enough:
That said, there’s still the adjustment problem. Floyd correctly says that this still looks very hard; but I see that he’s still buying the official line that Ireland is well along in the process, where the reality is that much of the apparent progress may be a statistical illusion.
Oh, and market expectations of euro area inflation, as measured by the German breakeven, are still way too low to make successful adjustment plausible.
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.
Norris does end on a pessimistic note:
In the short run, Mr. Draghi has avoided disaster. In the longer run, it is hard to see a course that enables the peripheral countries to regain prosperity and competitiveness while keeping the single currency.
Krugman seems to accept Norris's analysis of the ECB's moves:
Regular readers may recall that I and others were adamant that it was essential for the ECB to step in and buy the debt of troubled governments, to head off what looked very much like self-fulfilling panic. The ECB refused to do that, and many of us took that refusal at face value — but the argument is that in reality it did the functional equivalent, lending very large sums to banks with sovereign debt as collateral, so that it was in effect doing the purchases we wanted, but laundering those purchases through banks.
But of course he thinks Norris isn't pessimistic enough:
That said, there’s still the adjustment problem. Floyd correctly says that this still looks very hard; but I see that he’s still buying the official line that Ireland is well along in the process, where the reality is that much of the apparent progress may be a statistical illusion.
Oh, and market expectations of euro area inflation, as measured by the German breakeven, are still way too low to make successful adjustment plausible.
