Europe’s Secret Bailout

Nov 28, 2016 Hans-Werner Sinn

While the world worries about Donald Trump, Brexit, and refugees, the European Central Bank continues to work below the public radar on its debt-restructuring plan – also known as quantitative easing – to ease the burden on the over-indebted eurozone countries. It's a high-risk operation, especially for Germany and the Netherlands.

MUNICH – While the world worries about Donald Trump, Brexit, and the flow of refugees from Syria and other war-torn countries, the European Central Bank continues to work persistently and below the public radar on its debt-restructuring plan – also known as quantitative easing (QE) – to ease the burden on over-indebted eurozone countries.

Under the ECB’s QE program, which started in March 2015 (and will likely be extended beyond its scheduled end in March 2017), eurozone members’ central banks buy private market securities for €1.74 trillion ($1.84 trillion), with more than €1.4 trillion to be used to purchase their own countries’ government debt.

The QE program seems to be symmetrical, because each central bank repurchases its own government debt in proportion to the size of the country. But it does not have a symmetrical effect, because government debt from southern European countries, where the debt binges and current-account deficits of the past occurred, are mostly repurchased abroad.

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0 Comments on this paragraph, 13 Comments on this article

Klaas-Jan Visser Jan 9, 2017

This passage seems to suggest that the Target balance has resulted from the ECB QE policies. As far a I am aware the Target balance is also driven by the trade surplus which is a different issue not directly impacted by ECB policy. So my question is what the total balance mentioned here is composed of.
Another question I have is how the Target balance will be impacted if the bonds bought under the QE program mature while being owned by a Central Bank and are resold in the open market once the QE program would be reversed.
A new reply to this comment has been posted.
Piero Thor Dec 12, 2016

it's not Secret. It's clear both for Italians Informed like me and also for Germans like you. What isn't clear to You is : why South is Indebted e Nort is Creditor ? Very simple. Because this is 3° Centuries of Capitalism, and TOTAL EUROPE SovraProduction Capacity IS PERMANENT. It's different from '900 because NOW Innovation Technology Work Destruction is impossible to Compensate with New REAL Job Creation. Translate in simply : if now in VW works 3 workers there is 1 unemployed in Seat Spain and 1 unemployed in Fiat Italy who buy with debt (Target2) VW cars. If Seat&Fiat would become Higher Quality Factories => then 2 less unemployed in South but 2 more unemployed in Germany. Before EuroCurrency the Strong Mark and Weak Lira/Pesetas Compensated this Difference of Productivity. But now is impossible on long term.
YOU GERMANS ARE IN TRAP : if You will RE-IMPOSE REAL Austerity + NO ECB QE (Masked Transfer Union Monetization) => then Germany Kills His Customer so High Unemployment in Germany + ItalExit&SPainExit + CHAIN DEFAULTS also of DetuchBank + CommerzBanks + Sparkasse (+CreditAgricole + SocGen + Bnp + Dutch Banks like Ing) + Devaluation of 30% of Credit Target2 converted in Lira&Pesetas. And of course Default of Italy Debt&Banks. But FOR OLD ('900) ORDOLIBERIST LIKE YOU is IMPOSSIBLE TO UNDERSTAND THAT the ORIGINAL SOURCE OF PROBLEM IS CYCLE MATURITY OF EUROPE (Western) CAPITALISM WITH SOVRA-PRODUCTION CAPACITY BAD DISTRIBUITED BETWEEN REGIONS.
So in the end what will happen ? Simple: When Rate will Hike => Default of South LEAD TO CHAIN DEFAULT OF NORTH => your SAFE RULES like Bail In & CAC clause & Kapital Key in Ecb & No Deposit Assurance Scheme & etc are only PAPER JOKE that will be go in rubbish in 1 night.

DESTINY IN MEDIUM TERM WILL BE :

OR Euro BreakUp + DOUBLE DEFAULT SOUTH NORTH

OR Helicopter (forced by Panic) TO SAVE BOTH SPUTH AND NORTH.

It doesen't matters that You don't like this.
This is what will happen BY NECESSITY OF FACTS.
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Mauricio Duran-Loriga Dec 9, 2016

And one more thing.
The Eurosystem is effectively running as a gold standard system for all member countries but Germany. That means independent countries central banks can not print euros (add balance sheet reserves) at wish. Except Germany, through a tricky gimmick.
Remember crisis 2000-2002, Germany threw in the kitchen sink at internet start-ups, and it ended in total ruin. So Germany needed a huge push. German banks engineered a one in a lifetime credit expansion binge to PIIGS countries, and debtor countries went on a one in a lifetime shopping spree for German goods.. Happy days for everyone!
This gimmick amounted to the Bundesbank printing currency, except for the consequences regarding exchange rate equilibrium.
Current ECB's QE is truly beneficial for debtor nations, as it amounts to a partial and temporary lift of the gold standard rigidity. A bit like when one catches a fish and comforts it with a wet cloth.
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Mauricio Duran-Loriga Dec 7, 2016

By reading this article one could conclude that GIPS are witty profiteers that that rob poor innocent Germans and Dutch, that after nearly 20 years of existence of the Target system are still giving away money as if there was no tomorrow.
The Eurosystem is a very poor mechanism, and also very rigid one.
Target is now used to accomplished certain tasks it was not designed for.
However, if the GIPS exited the Eurosystem in a disorderly manner, the least problem for Germany would be the Target balance.
Basically, the one and only reason for ECB to allow QE is to preventively bailout French and German banks as a result of Southern banks coming to roost with their rotten balance sheets.
The European cancer that is destroying nations is called welfare state. Spain allocates 52% of its overall budget to the welfare state. And growing asymetrically relative to GDP growth. That is unfair, unreasonable, unsustainable.
Germans will not pay the tab. So either welfare state is haircut by 70%, either Euro hyperinflation pays the nominal tab, either the Euro is littered and the new devalued currencies pay the nominal tab.
Do we care about Target ? I mean, really ?
A new reply to this comment has been posted.
Brett Wilcox Dec 4, 2016

A question I hope someone can answer. Yes, Germany has a positive Target2 balance of 716 billion Euros. But the ECB has funded the purchase of about 275 billion of German bonds. If the Euro ultimately breaks up, will the bond purchases partially offset the Target 2 loses, which today would leave a net of about 441 billion Euros? Is ECB bond buying also a partial hedge to Euro breakup?
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Richard Simpson Nov 30, 2016

No mention of the northern countries reaping huge benefit from a shared, lower value currency. I wonder how much a BMW priced in Deutsch marks would cost in sterling or dollars?
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Henk Crop Nov 30, 2016

mr Sinn explains how Germany and the Netherlands are, under the radar, being made accountable for debts created by Southern European countries in particular Greece, Italy, Potugal and Spain.
It is not only that. The ECB by creating a huge amount of money keeps the interest rates low. As a result of that the Pensionfunds in the Netherlands ( Germany) cannot maintain their capital and have trouble paying their their pensioners. Before we move into a fiscal union where forever the North will have to subsidise the South, I think the question should be raised if it would not be better to split the Eurozone. The EU is moving from one disaster to another. People are getting tired of an autocratic institute that seems to bring more trouble than solutions.
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Colin Doyle Nov 30, 2016

The euro belongs to all the countries in the zone, not just to those who remain. When the euro started, local currency debts were transformed into euro debts at a defined transfer rate. A country leaving the euro zone would be able to reconvert their euro debts (to countries like Germany) back into their local currency.
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Peter Schneider Nov 29, 2016

This shall be called democracy?
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vivek iyer Nov 29, 2016

This analysis only goes through if GIPS plan on going bankrupt and quitting the zone. However, in that case, the ECB becomes the 'bad bank' and quietly disappears from history leaving the Bundesbank, which has lowered yields on German bonds through Q.E, looking at an upside.
In other words, Sinn's repeated warnings is paranoid nonsense. The way ECB Q.E is structured means that GIPs or anyone else 'gaming the system' while planning to defect ends up paying a huge price whereas the strong countries look better than ever.
The ECB Q.E rules are crazy but they don't involve some devious scheme by smarmy Latins looking to defraud honest Teutons.
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Paul Daley Nov 29, 2016

So, Eurozone operations ensure that surplus states have a large financial interest in the performance of their partner economies.

That's a mistake?
- Steve Hurst Nov 29, 2016
  
  @Paul
  
  The issue is systematic transfers from N to S. If they do not occur the local debt balloons. If they do occur it is a flow from N to S which n voters sooner or later will object to. This is just the GR issue again and the central role of Germany. This is just the procrastination project or the Return of the Mummy
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