I was struck last week by the vehement criticism of the extension of Fed swap lines with the European Central Bank. Critics called it a ‘bailout’ and there’s an element of truth to that. This was Republican presidential candidate Jon Huntsman:
US taxpayers are indeed being dragged in through the back door — but I think they should be glad of it. Seen a little differently, the swaps are a small part of the tribute that the rest of the world pays to the US for the pleasure of using the dollar as its reserve currency.
UPDATE: 6.12.2011 14.37 It looks as though the ECB will not have to resort to issuing bills just yet. This week’s operation was overbid. Here are the results: http://www.ecb.int/mopo/implement/omo/html/20110136_all.en.html
Following last week’s snag, the European Central Bank will hope this week’s operation to “sterilise” its government bond purchases runs a little more smoothly.
The timing of the snag, coming as pressure mounts on the central bank to increase the scale of its bond purchases substantially, could not have been more unfortunate.
But the snag may not cause too great a headache for the ECB just yet.
UPDATE: Angela Merkel, German chancellor, in Paris has just announced a u-turn: under the new ESM, private sector investors will not be required to bear some losses. The ECB will be pleased. See ft.com for more.
European Central Bank policymakers have become more outspoken in attacking “private sector involvement” in Greece’s bail-out. The plan to persuade banks to take a “haircut” on their Greek bonds was “a terrible mistake,” according to Athanasios Orphanides, Cyprus’s central bank governor and ECB governing council member.
“By forcing the impairment of any state bond we have triggered concern internationally of all state bonds in the eurozone and that’s one of the key reasons we have a problem,” he told his country’s parliament.
I have noted before the ECB’s strong opposition to PSI generally and in Greece’s case specifically. The view from Frankfurt is that it simply undermines investor confidence in the whole eurozone. In other words, if Greece’s difficulties had been better managed earlier, Italy and Spain would not have been caught up in the contagion and the eurozone would not now be facing an existential crisis.
It is the polar opposite view of many economists outside the eurozone -