Daily Archives: November 24, 2011

Claire Jones

Paris is again calling on the European Central Bank to act as lender of last resort for governments. From the FT’s Hugh Carnegy in Paris:

Alain Juppé, the French foreign minister, stepped up the pressure on Thursday, saying intervention by the ECB was a matter of urgency.

Speaking on France Inter radio, Mr Juppe said the market’s cool reception of Wednesday’s German Bund auction showed that the crisis “touches all the economies, including the most solid”.

“There is urgency. We will talk about (ECB intervention) today in Strasbourg. I think and hope that the thinking will evolve and that the ECB should play an essential role to re-establish confidence.”

Paris is hoping that, backed by similar pressure from other European countries, the US and even the media, Germany and the ECB itself could be persuaded to bend their hitherto rigid refusal to act, in effect, as a lender of last resort.

Regardless of the rights and wrongs of Paris’s stance, if the French want more action from the ECB, then they might want to consider thinking a little more carefully about what they say. It is not just Germany and European treaties that are barriers; no central bank in its right mind is going to agree to being a lender of last resort for governments.

But that doesn’t mean that the central bank couldn’t be persuaded to step up its sovereign debt purchases on other grounds.  

Claire Jones

As the chart below shows, banks tend to own the sovereign debt of the country they call home.

This tendency is counter-intuitive. Rather than dispersing risk by spreading their holdings of government debt over several countries, banks are raising the chances of a vicious circle developing between the health of the sovereign and the country’s financial system – a phenomenon that lies at the heart of the eurozone crisis.

Various reasons have been suggested for this in the past. But, in a note published on VoxEU.org on Thursday, economists Raghuram Rajan and Viral Acharya add another.