Is a eurozone bailout already in play?
Listen: they can go kicking and screaming all they want to but, unless they’re on board to with ending the euro, it seems likely that the rich nations in Northern Europe will end up bailing out their poorer brethren. Whether they call it a bailout or not is another issue. But check out what’s already happening.
From Reuters via Xe.com:
The Dutch central bank cancelled its interim dividend, thereby increasing the government’s budget deficit, saying it may make a loss in 2011 due to the European Central Bank’s bond buying programme, the Dutch Finance Minister said on Tuesday.
The DNB scrapped the dividend of 575 million euros it was expected to pay to the state, increasing the 2011 budget deficit to 4.6 percent, De Jager said. The Finance Ministry had been forecasting a 2011 deficit of 4.5 percent.
That’s a HUGE amount that the Dutch government will forego. This adds to budgetary pressures which are already forcing it to consider deeply unpopular moves like ending the U.S.-style deduction on mortgage interest payments. Missing out on €575 million is a tough move for an economy projected to remain in recession until at least next summer. And why? Because the Dutch, like all eurozone governments, are shareholders of the European Central Bank. Via its Securities Market Program the ECB has bought around €207.5 billion in distressed European sovereign debt since May of last year. And since the market value of the Greek, Irish, Portuguese, Spanish and Italian bonds have fallen since then, the ECB’s shareholders may have to plug the holes in its balance sheet. While no one has asked them to write a check just yet, the DNB is preparing in case this does come to pass. And the money to do this will come from the Dutch taxpayers who stand behind the Dutch government which is the only shareholder of the Dutch central bank.
So the question of whether taxpayers in rich nations should be asked to bail out their troubled comrades is really a moot point. A better question is: will it actually work? While the ECB has put big money on the line in the Securities Market Program, on its own, it has not been enough to bring Italian yields down meaningfully.
It’s difficult to say that the Dutch knowingly signed up to all of this. The ECB insists that the SMP is needed to help it transmit a monetary policy that’s been hindered by dysfunctional markets, but this seems like an awfully convenient argument to get around Article 123, which prohibits monetary financing. In fact, when anyone has troubled to ask them the Dutch have not been shy in rejecting a more tightly knit Europe. Maybe the Dutch zoo that decided to accept the old gulden currency for just one weekend has the right idea.