Might the world be witnessing the first signs of stabilization in the European debt crisis that has placed the euro’s very existence in doubt? That’s a hypothesis some observers are starting to consider carefully, thanks to a massive though discreet injection of money by the European Central Bank (ECB) into Europe’s banking system—and, indirectly, into its credit-parched financial markets. On Wednesday, the ECB said it will be pumping nearly $640 billion into European banks via three-year loans at interest rates of just 1%–a move many experts (led by officials in America) have been urging for months. Indeed, that enormous gush of fast and cheap money flowing into Europe’s financial bloodstream has some commentators comparing the ECB’s belated action to steps the U.S. Fed took in 2008 to keep the entire banking and investment system from collapsing.
By far the best and most detailed accounts of the ECB’s infusion and the possible impact it may have in quelling Europe’s crisis come from the New York Times (whose coverage of the European turmoil has been so consistently brilliant). One piece on Thursday examined the massive response by European banks to the ECB’s loan offer. The article compared the logic and possible consequences of the ECB’s action to the Fed’s 2008 crisis response, contrasting the American intervention to the European, explaining why the ECB resisted taking such an activist role until now.
The other related article was written by the Times finance and economics expert Floyd Norris both applauds the ECB’s move and explains why it stands to go a long way towards propping up Europe’s over-extended banks. Norris says the action may avert a further a tightening what has become increasingly parsimonious lending habits by European banks, behavior that has already undermined economic growth in Europe. Just the promise of new cash inflows, he notes, has already had a positive impact on euro zone bond sales. To paraphrase Norris, with lots of easy money pouring in from the ECB, banks can resume investing, lending to one another–and to myriad businesses–and help take some of the pressure off Europe’s most financially-strapped governments buy purchasing their new bonds at more affordable rates. The ECB’s loan logic, Norris explains, was as overdue as it seems clear and effective:
In reality, it was an offer banks could not refuse. They will initially pay the central bank’s official rate of 1 percent. But if the bank lowers the rate in coming months — as it is widely expected to do — the rate on these loans will drop as well.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.
That option was one European banks had evidently started acting on even before Wednesday’s announcement. New bond issues by several euro zone states over the past week have not only been finding far more buyers than earlier in the debt crisis; they’ve also been selling at considerably lower rates than for recent issues—especially for Italian and Spanish bonds, which had seen interest rates demanded climb close to an untenable 7%. News that the amount of money the ECB had agreed to lend banks was considerably more than even many optimists had anticipated further fueled continental bond purchases, and left some experts hopeful the European Central Bank had finally deployed the so-called “big bazooka” show of force necessary to convince spooked markets that it will do whatever it takes to resolve Europe’s expanding debt crisis.
So is all finally good after nearly two years of almost relentless negative developments in Europe? In terms of the most immediate threat to the European and global banking and finance system, that seems to be the case. Though the underlying debt problem in Europe remains enormous, the ECB’s move—much like that of the Fed before it—appears to have halted the evaporation of credit, given banks breathing room, restored a degree of calm, and taken worst heat off besieged euro zone economies. However, there is a potential longer-term downside to the ECB’s approach if it follows the Fed’s earlier example to the letter. After all, banks will make huge profits at no risk with what amounts to public money, using the same market methods and motives that produced the crisis of debt, excess, and fear of failure in the first place. Anyone heard this story before?
True, the ECB’s distance from national governments and coffers makes the link to European taxpayers’ pockets indirect (and not as close as the Fed’s relation to the American public). Still, this isn’t Monopoly dough being breezily minted, and is clearly backed up in a way that banks and markets take seriously. Which is why it’s not unreasonable to fear that—once the worst of the peril has passed—Europe will also forget to impose the regulation, transparency, accountability, and general decency on its banks and financial markets that the U.S. earlier decided to forgo once its emergency appeared over. We’re seeing the main private sector players in the European calamity already back to business as usual—and that’s before we’re even sure the euro, Europe, or any of its economies are even going to make it out of this storm alive.
As another excellent story published Friday in the Times details, a bevy of Europe’s biggest but most vulnerable banks are already thinking about appearances and profits as they give short-shrift to new European rules designed to heighten their financial stability. The new strictures require banks to increase the level of their most solid (or Tier One) assets to 9% of total capital as a hedge against exposure to risky debt. Instead, many are more worried about paying higher dividends to shareholders. The article leads with the example of Spanish bank Santander, which is preparing to pay stockholders over $5.2 billion in cash, and even more in new shares, despite needing to come up with over $19.6 billion in Tier One capital by May to meet the new European requirement of 9%. But the piece notes that Santander’s sense of priorities appears to be the rule rather than the exception in European banking circles—much as the focus on profits, salary increases, and bonuses remained the fixed obsession in the U.S. financial sector even as public funds were being used to prevent it from collapse.
Europe today faces the same dilemma America did in 2008-09. It is a choice of either letting irresponsible banks, financial groups–and even over-spending governments—fail; or allowing central institutions to use huge amounts of public money to bail everyone out. Like America before it, Europe has the same requirement once the worst has been averted: making sure central banks and politicians make good on promises to finally and emphatically sanitize assisted (or rescued) financial markets once the urgency is over. There’s real doubt Europe will fare any better than America did. Because politics—like money—works pretty much the same way on both sides of the Atlantic, which raises the risk that Europeans, too, will watch banks, financial groups, and markets to return business as usual–just as everyone else starts to shoulder years of austerity, economic sluggishness, and persistent joblessness to get debt levels down.