Eurocrats and Their Vassals

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

On February 29, 2012, the European Central Bank (ECB) lent €529 to European banks, most of it, in three-year loans. This was the second such operation, launched with another mind-numbing acronym: LTRO (long-term refinancing operation). In the first LTRO (December 2011), €489 was lent to European banks. In the February 29, 2012, operation, 800 banks borrowed. According to the Financial Times, "broader collateral rules drew in smaller banks."

            In the spring of 2011, the number of securities accepted by the ECB as acceptable collateral for loans to European banks was expanded from 19,000 to over 28,000. That was a desperation maneuver to save the euro. Since, the ECB has expanded the collateral list at least twice. Leading up to the latest LTRO, the ECB added over €7 trillion of previously forbidden collateral – that is, €7 trillion, if one accepts the value at which this nuclear waste was carried on European bank balance sheets. Now, it sits on the ECB’s balance sheet, which has risen to €3.02 trillion ($3.96 trillion), 30% larger than the Federal Reserve’s Pandora’s Box.

In this entirely fraudulent paper chase, the banks that borrowed LTRO money put some of it to work in sovereign carry trades. The banks have borrowed at 0.25% from the ECB and are buying sovereign bonds with much higher yields. Intesa Sanpaolo SpA received €24 billion and "said they would use part of the cash to buy Italian sovereign bonds. Bank Civica SA did the same with Spanish sovereign bonds." Italian 10-year bond yields fell on February 29 from 5.33% to 5.17%. Spanish 10-years fell from 5.03% to 4.98%. Interestingly, Portuguese 5-years rose from 15.75% to 16. 54% on the same day, which may indicate the next default.

Market commentators are saying how well the LTRO worked: their proof being lower sovereign bond yields, which show "market participants have been reassured the Euro Project is back on track." (This is not a single, direct quote, but the form in which dozens of market commentators have reassured the banks that employ them of their added value.) There is some truth to that claim. The euro bureaucrats will do anything to prevent the euro’s failure. Deceptions such as the LTRO may reassure market participants, even though the additional debt burden (that will not produce a single gumball) sinks Europeans into a deeper crypt.

It should be understood that the LTRO produced nothing other than more finance and inflation. (Gasoline in Europe now costs 9% more than in 2008. Andy Lees (AML Macro Limited) estimates that, converted into U.S. dollars, gas now costs $9.65 a gallon in Europe.) European businesses and the little people are not target audiences.

The Eurocrats continue to dine well in Brussels while adding another layer of debt under which their vassals are crushed. Returning to a long-term theme here, trustworthy collateral in proportion to the stated value of paper assets continues to fall. When the world once again understands the importance of collateral in relation to the worth of the paper it is printed on, the price of trusted collateral will soar.

  1. Oldrich says

    Sensitive and caring libertarian Marc Faber about Occupy Wall street in his own words :

    “Listen you lazy bugger, … you have to work more for less”….

    One just have to love these caring, tender-hearted libertarians shedding crocodile tears for “little guy”.
    Hey, employees in the US should realize that they are working too little and are overpaid. Fortunately there are countries with real free market values like China

  2. David Lazarus says

    Free markets only exist in labour and certainly not at levels well above median levels. Stock and bond markets are rigged, as are commodities to a lesser extent. So I can see why gold has its backers. The current neoclassical policy is damaging the value of fiat currency. All the efforts are to extend and pretend on the problems in european banks. So problems are ahead.

    1. Oldrich says

      Yes. And the libertarian cure is to let all the institutions that took decades to build (they were not an end in itself but a result of often tragic and costly historical experiences) to fall apart or better yet to actively dismantle them. Yes. That is a fine idea.
      And as to these EU bashers. I am sure they will be finally happy when it breaks and the old national elites which for centuries have ruled for benefit of the “little guy” will take over. They just cannot wait to start caring and working tirelessly for well-being of its people.

      1. David Lazarus says

        I am no libertarian, but I do see significant benefit of allowing bust banks to be nationalised temporarily and then broken up. Allow moral hazard to discipline banks in future. Then privatising them as soon as possible. This will maintain banking services for small businesses and maintain most bank jobs. Big banks are not interested in small business lending. They now are too global and so breaking them up might help stimulate small business lending, who are the real job creators. It would also reduce the overall level of debt in the economy. The only investors who should be saved should be small depositors at the level of deposit guarantee and no higher.

        As for the EU I have more faith in them protecting the public, than national governments. The problems are with neoclassical economists at the ECB which is making the situation far worse.

        The overall problem of the crisis has been debt levels and they want to solve it with more debts for the periphery with tougher terms. Greece will be lucky to get to the target of 120% debt to GDP by 2020. I suspect that they will collapse long before then. What should have happened is debts that are unsustainable should be written off.

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