In the eye of the storm: the debt crisis in the European Union (3/7)
The ECB, ever loyal to private interests
by Eric Toussaint
In July - September 2011 the stock markets were again shaken at international level. The crisis has become deeper in the EU, particularly with respect to debts. The CADTM interviewed Eric Toussaint about various facets of this new stage in the crisis.
Part 3: The ECB, ever loyal to private interests|1|
CADTM: On 8 August 2011 the ECB started buying bonds issued by European States that had run into trouble. What do you think of this?
Eric Toussaint: A first important point to remember: the media announced that the ECB would start buying bonds without specifying that this would only occur, as usual, on the secondary market.
The ECB does not buy bonds on the Greek debt directly from the Greek government but from banks on the secondary market. This is why banks were pleased on 8 August 2011.
Indeed, between March 2011 and 8 August 2011 the ECB claims that it did not buy any bonds on the secondary market. This was a source of aggravation for the banks since, as they wanted to get rid of the Greek bonds and the bonds of other States experiencing difficulties, they had had to sell them at knock-down prices on the secondary market. Most of them only sold a few because prices were really too low |2| This is why they insisted that the ECB start buying again.
CADTM: The ECB’s return to the secondary market raises the price of Greek bonds, is that it?
Eric Toussaint: Yes, but only for a while, and what matters is that the ECB buys in huge quantities and at a higher value than the market price. Between May 2010 and March 2011 it bought Greek bonds from bankers and other institutional investors for EUR 66 billion. Between 8 and 12 August, i.e. within five days, it bought Greek, Irish, Portuguese, Spanish and Italian bonds for EUR 22 billion. Over the following week it bought another 14 billions’ worth. We do not know the proportion of Greek bonds but we can see that the purchase was massive. What is clear is that the ECB’s practice of buying bonds makes it possible for institutional investors to speculate and make juicy profits.
Indeed, banks can buy bonds at cut prices on the secondary market or much more unobtrusively on the OTC market that is outside any regulation (42.5% of their face value in the days following 8 August 2011 and even lower a few weeks later) and sell them to the ECB at 80%. The volume of this kind of transaction may be marginal, it is difficult to know exactly. But they certainly are most profitable and I cannot see how the ECB or market authorities could prevent this, even if they wanted to.
We have to remember that transactions on the secondary market are barely regulated, and that next to the secondary market there is the OTC market that is not regulated at all by the public authorities. On a regular basis, debt bonds are sold and bought as ‘short sales’, i.e. a buyer, for instance a bank, can buy bonds for dozens of millions without having to pay for them when receiving them. Buyers promise they will pay, they get the bonds, sell them on, and pay what was owed with the proceeds of the resale. This proves that the purchase was never intended to be used for its own yield, but was bought to be sold on immediately to maximize profit (speculation).
Of course if they cannot sell these bonds on at a good price or at all, they cannot foot the bill. This can lead to a crash, since hundreds of institutional investors play the same game and the amounts at stake are astronomical. Transactions on securities backed on the public debt of States facing problems amount to tens or hundreds of billions of euros on a liberalized market.
CADTM: Why doesn’t the ECB buy directly from the States that issue the bonds instead of buying on secondary markets?
Eric Toussaint: Because the governments concerned wanted to preserve the monopoly of the private sector on providing credit to public bodies. Direct lending to member States is prohibited by the ECB’s own statutes as well as by the Lisbon Treaty, and this also applies to central banks in the EU. The ECB therefore lends to private banks which in turn lend to States with other institutional investors.
As mentioned above, French, German and other banks sold Greek bonds massively in 2010 and in the first term of 2011. The ECB has so far been their first buyer and it buys above the secondary market price|3|
As you can see, this makes for all sorts of manipulations by the banks and other institutional investors, since bonds are warranted to the holders and the markets are liberalized. Clearly the private banks put pressure on the ECB for it to buy bonds at a higher price, claiming that they needed to get rid of them to clean up their balance sheets and so prevent another large-scale financial crisis.
July and August were good months for such blackmail, as the stock markets went through a fall of 15% to 25% in their indexes between 8 July and 18 August 2011. Share prices of those banks that lent money to Greece, French banks in particular, literally plummeted. Panic-stricken, the ECB gave in to the bankers’ and institutional investors’ pressure and started buying bonds again. The ECB’s intervention saved the day (at least for a while) for a number of major banks, particularly French ones. Once again public institutions helped out the private sector. But there is an even more outrageous aspect to the ECB’s behaviour.
CADTM: Can you explain?
Eric Toussaint: It’s very easy. It lends money at a very low rate to private banks, 1% from May 2009 to April 2011, 1.5% today, merely asking banks that receive the loans to provide a financial guarantee. Now what the banks provide as guarantee are the very bonds (called ‘collaterals’) on which they receive, if they are Greek, Portuguese or Irish bonds, interest rates ranging from 3.75 to 5% if they were issued for less than a year (see above), and more if they are bonds maturing after 3, 5 or 10 years.
CADTM: Why do you call this outrageous?
Eric Toussaint: Here is why. Banks borrow at 1% or 1.5% from the ECB to grant loans to some States at 3.75% at least. Once they have bought the bonds and cashed their interest, they win twice over: they leave these bonds as collateral to borrow again at low rates from the ECB and loan this money to States at high interest rates. The ECB makes it possible for them to make even more juicy profits.
Moreover, from 2009-10 the ECB has changed its safety and security criteria and agreed to banks using high-risk bonds as collateral, which obviously encourages those banks to make inconsiderate loans since they are sure to be able either to sell the bonds to the ECB or to use them as guarantee.5 It seems logical to consider that the ECB should behave differently and lend directly to States at 1 or 1.5%, without lavishing gifts to bankers as it does.
CADTM: But does it have a choice since this is prohibited by its statutes and the Lisbon Treaty?
Eric Toussaint: A number of dispositions in the Treaty are not adhered to anyway (the debt/GDP ratio that should not be over 60%, the government deficit/GDP ratio that should not be over 3 %), so considering the circumstances we can forget about that one too.
For the next stage we need to be aware that various EU treaties have to be abrogated, that the ECB statutes have to be radically changed, and that the EU has to be founded on other premises.6 Yet to achieve this, the balance of power has first to be changed through massive street mobilizations.
End of the third part
Translated by Christine Pagnoulle and Vicki Briault in collaboration with Judith Harris
|2| In the Hellenic Republic Public Debt Bulletin, n° 62, June 2011, p. 4, we clearly see that the secondary market literally dried up from May 2010 when the ECB started buying bonds.
|3| By the end of 2009 before the Greek crisis broke out, French financial institutions (mainly banks) held 26% of Greek bonds sold abroad, German banks held 15%, 10% for Italy, 9% for Belgium, 8% in the Netherlands, 8% in Luxembourg, 5% in Britain. In short, financial institutions, especially banks, of seven EU countries held no less than 81% of Greek bonds sold abroad.
Éric Toussaint, doctor in political sciences (University of Liège and University of Paris 8), president of CADTM Belgium, member of the president’s commission for auditing the debt in Ecuador (CAIC), member of the scientific council of ATTAC France, coauthor of “La Dette ou la Vie”, Aden-CADTM, 2011, contributor to ATTAC’s book “Le piège de la dette publique. Comment s’en sortir”, published by Les liens qui libèrent, Paris, 2011.