Daily Archives: October 24, 2011

1) Member states of the eurozone agree on the need for a new treaty creating a common treasury in due course.  They appeal to European Central Bank to co-operate with the European financial stability facility in dealing with the financial crisis in the interim – the ECB to provide liquidity; the EFSF to accept the solvency risks.

2) Accordingly, the EFSF takes over the Greek bonds held by the ECB and the International Monetary Fund.  This will re-establish co-operation between the ECB and eurozone governments and allow a meaningful voluntary reduction in the Greek debt with EFSF participation.

3) The EFSF is then used to guarantee the banking system, not government bonds.  Recapitalisation is postponed but it will still be on a national basis when it occurs.  This is in accordance with the German position and more helpful to France than immediate recapitalisation.

4) In return for the guarantee big banks agree to take instructions from the ECB acting on behalf of governments.  Those who refuse are denied access to the discount window of the ECB.

5) The ECB instructs banks to maintain credit lines and loan portfolios while installing inspectors to control risks banks take for their own account.  This removes one of the main sources of the current credit crunch and reassures financial markets.

6) To deal with the other major problem – the inability of some governments to borrow at reasonable interest rates – the ECB lowers the discount rate,  encourages these governments to issue treasury bills and encourages the banks to keep their liquidity in the form of these bills instead of deposits at the ECB.  Any ECB purchases are sterilised by the ECB issuing its own bills.  The solvency risk is guaranteed by the EFSF.  The ECB stops open market purchases.  All this enables countries such as Italy to borrow short-term at very low cost while the ECB is not lending to the governments and not printing money.  The creditor countries can indirectly impose discipline on Italy by controlling how much Rome can borrow in this way.

7) Markets will be impressed by the fact that the authorities are united and have sufficient funds at their disposal.  Soon Italy will be able to borrow in the market at reasonable rates.  Banks can be recapitalised and the eurozone member states can agree on a common fiscal policy in a calmer atmosphere.

The writer is chairman of Soros Fund Management and a philanthropist. He is author of ‘The Crash of 2008′ and ‘What it Means’

The A-List

About this blog Blog guide
Welcome. This blog is available to subscribers only.

The A-List from the Financial Times provides timely, insightful comment on the topics that matter, from globally renowned leaders, policymakers and commentators.

Read the A-List author biographies

Subscribe to the RSS feed

To comment, please register for free with FT.com and read our policy on submitting comments.

All posts are published in UK time.

See the full list of FT blogs.

What we’re writing about

Afghanistan Asia maritime tensions carbon central banks China climate change Crimea emerging markets energy EU European Central Bank George Osborne global economy inflation Japan Pakistan quantitative easing Russia Rwanda security surveillance Syria technology terrorism UK Budget UK economy Ukraine unemployment US US Federal Reserve US jobs Vladimir Putin


Africa America Asia Britain Business China Davos Europe Finance Foreign Policy Global Economy Latin America Markets Middle East Syria World


« Sep Nov »October 2011