The ECB’s Secret Bailout Strategy

MUNICH – Why did Greece, Ireland, and Portugal have to seek shelter under the European Union’s rescue umbrella, and why is Spain a potential candidate?

For many, the answer is obvious: international markets no longer want to finance the “GIPS.” But that is only half true. In fact, international markets have not financed any of them to a considerable extent for the past three years; the European Central Bank has. The so-called “Target” accounts, hitherto ignored by the media, show that the ECB has been much more involved in rescue operations than is commonly known.

But now the ECB no longer wants to do it, and is urging eurozone members to step in.

Normally, a country’s current-account deficit (trade deficit minus transfers from other countries) is financed with foreign private capital. In a currency union, however, central-bank credit may play this role if private capital flows are insufficient. This is what happened in the eurozone when the interbank market first broke down in mid-2007.