Meanwhile in a rare statement from a central banker that I agree with, Mervyn King explains the Harsh Truth about the Meaning of "Lender of Last Resort"
The European Central Bank is under pressure to bail out indebted countries by printing more euros. But it really isn't as straightforward as that.Obama Accuses Eurozone of "Problem of Political Will"
It is a statement of why there is no easy solution to the crisis that involves the ECB simply cranking up its printing presses and lending to Italy, Spain and whoever else needs a helping hand. The ECB, under its mandate, is simply not allowed to lend to eurozone governments who are struggling to access funds at reasonable rates – and there are good reasons for that arrangement.
Here are the relevant remarks by the governor of the Bank of England at this morning's press conference.This phrase 'lender of last resort' has been bandied around by people who, it seems to me, have no idea what lender of last resort actually means, to be perfectly honest. It is very clear from its origin that lender of last resort by a central bank is intended to be lending to individual banking institutions and to institutions that are clearly regarded as solvent. And it is done against good collateral, and at a penalty rate. That's what lender of last resort means.
That is a million miles away from the ECB buying sovereign debt of national countries, which is used and seen as a mechanism for financing the current-account deficit of those countries, which inevitably, if things go wrong, will create liabilities for the surplus countries. In other words, it would be a mechanism of transfers from the surplus to the deficit countries.
The whole issue is, do they wish to make transfers within the euro area or not? That is not something that a central bank can decide for itself. It is something that only the governments of the euro area can come to a conclusion on.
Inquiring minds are reading Eurozone bond markets in turmoil as France and Germany dig in over ECB
The row between France and Germany over whether to use the European Central Bank to rescue the eurozone has intensified, further shattering international confidence that a solution can be found to the escalating debt crisis.In contrast to the unusually clear thinking by the Bank of England, Obama offers meaningless platitudes about what should be done, ignoring what can be done.
On a day when the US president, Barack Obama, accused the eurozone of suffering from a "problem of political will", Paris and Berlin clashed over whether the ECB should be called on to do more to bail out countries that are struggling to borrow.
Obama, on a visit to Australia, warned that Europe's leaders must do more to save the single currency.
"Until we put in place a concrete plan and structure that sends a clear signal to the markets that Europe is standing behind the euro and will do what it takes, we are going to continue to see the kinds of market turmoil we saw," he said.
More importantly Obama did not address the question as to why the Euro should be saved in the first place. The concept is fundamentally flawed and was doomed from the start, just as Euro skeptics said over a decade ago.
Rather than face that simple truth, European leaders and now president Obama want to save the unsavable.
Tensions Heat Up
The Guardian article continues ...
Tension between France and Germany was behind much of the market turbulence, traders said.Wolfgang Schäuble is a wishy-washy figure who at times makes sense. This is one of those times. However, he cannot be trusted as noted by these Schäuble Flip-Flops courtesy of Google Translate.
In France there was a plea for the ECB to take a bigger role in the rescue of the currency union. "The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe," said government spokeswoman Valérie Pécresse.
Germany stuck to its insistence that the central bank did not and should not have a mandate to do more.
"The way we see the treaties, the ECB doesn't have the possibility of solving these problems," said Angela Merkel, the German chancellor, after talks with Enda Kenny, the Irish prime minister, who is visting Germany.
Her finance minister, Wolfgang Schäuble, said using the ECB was the "wrong solution" and that Europe would "pay a high price in the long run" if it gave in to pressure from some governments and markets on the central bank's role.
21st December 2009Nonetheless, as long as Schäuble makes sense I will be happy to point it out. When he caves in to political pressure, I will point that out as well.
"We Germans cannot pay for Greece's problems."
16th March 2010
"Greece has not asked for help, this is why there is no decision, and there is no decision had been taken."
11th April 2010
Four weeks later, on 11 April, he decided to finance the first Euro-Greece-aid package of € 30 billion.
16th April 2010
"We still believe that the Greeks are on the right track and that they may end up not even have to take the help."
22nd April 2010
"The country has had no problems in financing themselves this week in the markets. The agreement on the assistance in an emergency has been a purely preventive measure."
Greece officially asked for help April 23. In early May a rescue package of 110 billion € was in the works.
27th April 2010
"Rescheduling not an issue"
The 110 billion euros in the first aid package "ceiling" is a one-time emergency assistance.
21st March 2011
The EU finance ministers decide on a rescue fund with legendary 750 billion euros (ESM) - with the voice Schäuble.
6th June 2011
Greece will receive a new package with more than 100 billion €. Schäuble said: Otherwise, "we face the real risk of the first disordered state of insolvency within the euro zone."
AND WHAT'S NEXT?
Previously, the Finance Minister is on his no to common bonds of all euro countries, the so-called Euro-bonds remained. But perhaps he thinks it is so different again next week .
Bond auctions are coming up tomorrow (Thursday) for Spain and France. All hell might break loose. If it doesn't on Thursday, it will soon. This crisis is rapidly coming to a head but no solution is being discussed.
Mike "Mish" Shedlock
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