There are a lot of reasons why attention has turned to the idea of leveraging EFSF via one of a number of possible methods. If this can be done, it takes a big step towards solving both the solvency and liquidity issues plaguing Euro area sovereigns and banks – on the liquidity front, a €2 trillion or €3 trillion fund is big enough to buy up Spanish and Italian bonds for a number of years, while €440 billion is big enough to absorb a lot of the potential losses.
The financial press are abuzz with various mechanisms that could be used to leverage up the EFSF. However, I was surprised today to twice read that Gros and Meyer’s proposal to have EFSF (or some vehicle funded by EFSF) register as a credit institution and borrow from ECB is likely to be illegal.
The Wall Street Journal reports
Klaus Regling, chief executive of the European Financial Stability Facility, told a podium discussion that “there are serious concerns” that such a scheme wouldn’t be allowed under the EU Treaty, which forbids the ECB from financing governments directly.
And at the FT’s Money Supply blog, Ralph Atkins writes
But Jens Weidmann, Germany’s Bundesbank president and ECB governing council member, has already made clear his opposition. Giving the EFSF access to ECB funding, Mr Weidmann argues, would be “monetary financing” – central bank funding of governments – which is banned under European Union treaties …
More crucially, an ECB legal opinion issued in March made clear that the European Stability Mechanism – a permanent fund expected to replace the temporary EFSF from 2013 – would not be allowed access to its liquidity because of the ban on monetary financing. “The ECB recalls that the monetary financing prohibition…is one of the basic pillars of the legal architecture of economic and monetary union,” its lawyers wrote then. I am not a lawyer, but to me that would also rule out giving the EFSF access.
The ECB legal opinion states
Article 123 TFEU would not allow the ESM to become a counterparty of the Eurosystem under Article 18 of the Statute of the ESCB. On this latter element, the ECB recalls that the monetary financing prohibition in Article 123 TFEU is one of the basic pillars of the legal architecture of EMU
Of course, we in Ireland have been here before. Back in 2009, a number of very serious people assured us that nationalising any banks would be inadvisable because the ECB was prohibited under the monetary financing clause from lending to nationalised banks. (That Anglo were at the time borrowing in a big way from the ECB didn’t seem to get in the way of what seemed like a great argument).
As I pointed out back then on a few occasions (e.g. here and here) this wasn’t true because while Article 123 of the current consolidated Treaty on the Functioning of the European Union states
1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
This is immediately followed by
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.
So while the ECB may recall the monetary financing prohibition, you could argue that they don’t recall it very well. One could quibble that EFSF is not currently not a “publicly owned credit institution” but it’s hardly high octane financial engineering to create a vehicle funded by EFSF that counts as such.
13 replies on “ECB and State-Owned Banks, Again”
This will leverage European Treasury exposure to the crisis will it not ?
How can leveraging the goverment base solve a Leverage crisis ?
What exactly is a base if it can be leveraged ?
The Honest thing to do if default on credit deposits is not a option is to introduce raw non govermental currency into the economic medium and inflate.
Monetization – the creation of more debt will just make this debt situation worse.
Europe cannot grow out of this crisis , too much strategic malinvestment has been made since liberalisation and decapitalisation began to accelerate in the 80s – import costs need to rise massively so that Europe can effectivally reduce consumption so that the physical economy can adjust to the new impoverished reality.
The Treasuries of Europe are being played by the CBs again.
Sad really but predictable.
Put 1 and 2 together and it appears the ECB or NCB can lend to a “bank”, nationalised or not, and that bank can buy government bonds. Less than brilliant drafting.
If you take that view then you have to imagine people in the core EZ “knowing” that the rules are not supposed to mean that and leaning on everyone to ensure they get the message.
Herr Scheauble says nein…
“Germany slams ‘stupid’ US plans to boost EU rescue fund
Germany and America were on a collision course on Tuesday night over the handling of Europe’s debt crisis after Berlin savaged plans to boost the EU rescue fund as a “stupid idea” and told the White House to sort out its own mess before giving gratuitous advice to others.”
Indeed, a drafting conflict.
Also for Lisbon 1, I read most of the EU treaties…and they were exceptionally long, and lacking in clarity.
What is needed is a nice short Constitution, like common law countries have (not like the demented waffle Giscard d’Estang proposed)
Indeed much of this crisis has worked to show that the EU’s laws and institutions are unworkable and confusing – and the Euro elite seem unfazed by such.
It’s as if the public bank can do it as long as treatment is “pari passu,” if you will, with a private bank.
Can I have my huge barrister/spinner cheque now?
“a €2 trillion or €3 trillion fund is big enough to buy up Spanish and Italian bonds for a number of years, while €440 billion is big enough to absorb a lot of the potential losses”
…but is it the right thing to do?
Can someone please outline how it’s expected that recapitalisation of European banks will work? Will they end up partially/fully owned by their respective state as happened in Ireland? The likes of Soc Gen or Deutsche Bank nationalised? Hard to believe.
Is Depfa accessing the ECB repo? If that is so, is that not monetary financing?
(I am not a lawyer; I am not an expert on anything.)
It seems odd to consider whether ECB involvement with the EFSF is permitted under Article 123 without mentioning the question of whether the EFSF itself is legal in any form given its Article 125 problems. Unlike Article 123, 125 contains no exception for indirect purchases or for lending to public-sector financial institutions. It also explicitly binds the individual member states, not only the Union. Bluntly, I have yet to hear anyone make a convincing argument that support for the EFSF under these circumstances is compatible with respect for the rule of law. (I don’t think appealing to article 122 will do the trick, because it’s hard to accept that the Greek public finances are an exceptional circumstance beyond Greece’s control.)
at this very minute, i’m not sure what Depfa is up to (think all its assets are being transferred into the German-domiciled FMS vehicle), but yes, up until a few months ago Depfa was a very heavy user (suggested 25-30bn-ish) of ECB repo. I can only assume that FMS will continue to do so out of Germany, although they are also trying to self-fund some of their activities at the moment too.
So if I understand it correctly. the BUBA hawks are objecting to ECB funding the EFSF because it would constitute monetary financing. However, such strictures may not apply in Germany, perhaps.
Will all the interest the ECB earns on these PIIGS bonds the ECB is buying result in a huge surplus of cash for the bank when the bonds mature in 10 years time?
(Assuming no default)
Dr Merkel ‘cracks the whip’ and … smiles.
Sarkozy rumoured to be hiding out on the Maginot Line and protected by a loyal tribe of Roma.
[I]This is the equivalent of putting explosives into a can, before kicking it down the road.[/I]