“Time is running out fast. I think we have maybe a few months — it could be weeks, it could be days — before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now.”
— Willem Buiter, Citi Chief Economist
As the boycott of sovereign bonds in Europe has spread beyond the south to triple-A-rated countries like Finland, the Netherlands and France, it’s become increasingly difficult for banks and corporations to get short-term financing. The cost of swapping euros for dollars is steadily rising while interbank lending has started to break down. As banks hoard more capital (to comply with new regulations) and scale-back their lending, companies will be forced to curtail operations and trim investment. This is how a debt crisis morphs into a credit crunch that slows growth and sends the economy hurtling back into recession.
According to the Financial Times, the four biggest banks in the UK have already cut “interbank loan volumes by more than 24 percent” a clear indication of the severity of the crisis. If policymakers are unable to settle on remedy that will calm the markets, then banks will continue to withhold credit and the economy will plunge.
On Friday, the ECB announced that it would increase its bond purchasing program (the Securities Markets Programme) to $27 billion per week in order stop the contagion and shore up teetering sovereigns like Italy and Spain. Here’s an excerpt from Bloomberg:
“European Central Bank governing council members have agreed on a 20 billion-euro ($27 billion) weekly upper limit for sovereign debt purchases as resistance among members grows, the German newspaper Frankfurter Allgemeine Zeitung reported…..
Council members from the Netherlands and Austria have added their voices to skepticism over the bond-purchase program, the newspaper said. Those objecting to buying include Bundesbank President Jens Weidmann, Executive Board member Juergen Stark and Yves Mersch, governor of Luxembourg’s central bank, FAZ said.” (“ECB Backs $27 Billion Weekly Limit on Government Bond Purchases, FAZ Says”, Bloomberg)
The battle between Germany–the largest economy in the eurozone–and the ECB has been brewing for months. Germany is adamantly opposed to any pooling of debts and, thus, will not support eurobonds, fiscal transfers or allowing the ECB to act as lender of last resort. Here’s how the Bundesbank President Jens Weidmann summed it up in a recent interview:
“The eurosystem… must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions.
I think the prohibition of monetary financing is very important in ensuring the credibility and independence of the central bank, which allow us to deliver on our primary objective of price stability.”
While the German position is principled, it is also impractical. Europe is in crisis, a slow-motion bank run is rapidly turning into a full-blown panic. Policymakers will have to be flexible if they want to avert another Lehman-type meltdown.
In contrast, the ECB position is not only unprincipled but also calculating and cynical. Everyone who’s followed events, knew that the emergency fund (EFSF) would never be ready in time to address the firestorm in the bond markets. That meant that yields would continue to rise (which they did) until the ECB provided some form of backstop. But the ECB delayed its intervention until it had toppled Prime Minister Silvio Berlusconi and inserted its own agent (Mario Monti) to carry out its diktats. In other words, ECB chief, Mario Draghi, deliberately manipulated bond purchases to effect regime change before thumbing his nose at Germany and doing exactly what he planned to do from the very beginning. For those who still doubt this, take a look at this article by Reuters on Friday:
“The European Central Bank is ready to show some flexibility in its response to the euro zone debt crisis, despite vocal resistance from a German-led group of ECB policymakers to the bank unleashing the overwhelming firepower it can muster….
ECB officials beyond the German-led group are ready to use the bank’s controversial bond-buying program to help lower government borrowing costs if they reach unsustainable levels, as Italy is experiencing….
ECB officials have welcomed the appointment of Mario Monti as Italy’s new prime minister and look forward to his administration delivering austerity measures to restore confidence in Italy’s strained public finances….
Marko Kranjec, chief of Slovenia’s central bank and, like Weidmann, a member of the ECB’s 23-member Governing Council, told Reuters on Saturday Italy’s austerity reforms go in the right direction and the ECB was willing to support sovereign borrowers as long as it does not put price stability at risk.
“We are flexible,” Kranjec said. He declined to comment in detail on the ECB’s bond purchases but said they would go “as far as needed.” (“Analysis: Despite fuss, ECB ready for some crisis flexibility”, Reuters)
“As far as needed”? So the matter had already been decided?
Can you see what’s going on here? Draghi and his banker cohorts never had any intention of following the terms of the treaty. (“No bail outs”) It’s just a big game. They just needed time to bump-off Berlusconi and install their own puppet regime before they went on their bond buying binge. Here’s more from Reuters:
“Euro zone and International Monetary Fund officials have discussed the idea of the European Central Bank lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest euro zone sovereigns, officials said….
But EU law forbids the ECB to finance government borrowing…..Policymakers have discussed, therefore, how to get the ECB involved in crisis-fighting without endangering its independence. Lending money to the IMF, rather than any euro zone government, could achieve that, officials said…
Article 23 of the ECB statute says that “the ECB may conduct all types of banking transactions in relations with third countries and international organizations, including borrowing and lending operations”.
The IMF could then use the ECB money to finance various rescue operations in the euro zone like bailouts, precautionary credit lines, on its own, or in cooperation with the EFSF.
“It is doable,” a second euro zone official said. Two further euro zone officials said they had heard of the idea.” (“ECB could lend to IMF for euro zone rescue: officials”, Reuters)
Can you believe how dishonest these people are? Treaties mean nothing to them; they’re just an inconvenience that can be brushed aside whenever they choose. And this is the way the eurocrats conduct all their business. Just consider the proposal for the European Stability Mechanism. The ESM is supposed to create a permanent facility that can provide loans to countries that are in distress due to rising yields on sovereign bonds. But the ESM’s real purpose is to establish a supra-national fiscal authority whose directors and staff share absolute “immunity from every form of judicial process.” The ESM is essentially a stealth government with unreviewable power to implement the policies of unelected banksters and bureaucrats.
The ESM creates the legal basis for an EU dictatorship. If the treaty is ratified, the ESM will be able to draw from a pool of $700,000 billion euros to purchase sovereign bonds of struggling countries. But that’s just the beginning, because according to Article 10: “the Board of Governors may decide to change the authorized capital and amend Article 8 accordingly”. In other words, the fund’s managers are free to increase the amount of the fund whenever they like and the individual states are “irrevocably and unconditionally” required to provide the money.
How’s that for democracy?
But what if a country is either unable or unwilling to pay extra money to the ESM?
Well, then, under Article 27, (titled) “Legal Status, privileges and immunities”…”The ESM …shall have full legal capacity to …institute legal proceedings.” So, the ESM has the right to sue the countries for damages for failure to meet the terms of the contract.
On the other hand, neither the ESM nor any of its managers or staff can be sued regardless of the offense. They have complete immunity from action taken by executive, judicial, or legislative branches of government. The treaty essentially repeals all civil and criminal statutes for anyone connected to the fund. Take a look:
Article 27–The ESM, its property, funding and assets shall enjoy immunity from every form of judicial process.
Article 27 (again): The property, funding and assets of the ESM shall…be immune from search, requisition, confiscation, expropriation, or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action.
Article 30: Immunities of persons: 1–Governors, alternate governors, directors, alternate directors, the Manging Director and staff members shall be immune from legal process with respect to acts performed by them …and shall enjoy inviolability in respect to their official papers and documents.
No one working for the ESM can be held accountable for anything regardless of how egregious the crime may be. And all personal and official documentation can be withheld from public review. No transparency whatsoever, complete secrecy.
Naturally, bankers, politicians, and other elites are trying to rush this anti-democratic abomination through the ratification process before the public figures out what’s really in it. They’re promoting the ESM as an essential tool for dealing with potential crises in the future. But, don’t believe it. The fatcats are just setting up for another round of looting.
See the full video–ESM; Treaty of Debt; Stop it Now!
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can be reached at [email protected]