The ECB’s Mysterious Plan to Rescue Italy

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.

Matt Yglesias provides a nickel summary of the ECB’s latest plan for rescuing Italy and other troubled countries in the eurozone:

Basically, as an alternative to directly guaranteeing the Italian government affordable loans the ECB is guaranteeing super-cheap loans to European banks. The banks are then able to plow that money into government debt at a profit and the strong demand for government debt assures that borrowing costs fall. This achieves two goals. On the one hand, the ECB can be bailing out the Italian fiscal situations while maintaining the legal fiction that this isn’t what they’re doing. On the other hand, precisely because doing it this backwards way creates profits for banks, the ECB is de facto engineering a taxpayer-financed bailout of Europe’s banks.

….The whole thing is incredibly slimey and I have to suspect that it will end poorly, but for the time being at least it’s working.

Because I’m a simpleminded person and don’t understand the intricacies of high finance, I too think this will end poorly. And it will end poorly for a very simpleminded reason: no matter how cheap the ECB’s loans are, there are only just so many Italian bonds that European banks want to buy. At some point — and this point is probably not all that far away — Europe’s banks will realize that nothing structural has changed, Italy is still in trouble, they have an awful lot of Italian bonds on their books, and 5.6% isn’t a high enough yield to buy more of them no matter how cheaply they’re getting their money. And then they’ll stop, and yields will go right back up.

There is, besides this, something else that puzzles me. The reason this plan is supposed to work is because the ECB is providing European banks with cheap money. But money is already cheap. American banks, for example, can raise money for next to nothing. So why aren’t American banks loading up on Italian bonds? Is it just because of the added exchange rate risk, which eurozone banks don’t have to worry about? That doesn’t seem really plausible. So what’s going on? Either Italian bonds are worth buying at 5.6% or they’re not, and this shouldn’t fundamentally depend on whether you’re a European bank, an American bank, or a Saudi Arabian bank.

This whole thing is very mysterious. I will continue to watch with skepticism that it will work, and a sense of wonder if it does.

FOLLOW THE MONEY

Corporations and billionaires don’t fund journalism like ours that exists to shake things up. Instead, support from readers allows Mother Jones to call it like it is without fear, favor, or false equivalence.

And right now, a longtime friend of Mother Jones has pledged an incredibly generous gift to inspire—and double—giving from online readers. That's huge! Because you can see that our fall fundraising drive is well behind the $325,000 we need to raise. So if you agree that in-depth, fiercely independent journalism matters right now, please support our work and help us raise the money it takes to keep Mother Jones charging hard. Your gift, and all online donations up to $94,000 total, will be matched and go twice as far—but only until the November 9 deadline.

$400,000 to go: Please help us pick up the pace!

payment methods

FOLLOW THE MONEY

Corporations and billionaires don’t fund journalism like ours that exists to shake things up. Instead, support from readers allows Mother Jones to call it like it is without fear, favor, or false equivalence.

And right now, a longtime friend of Mother Jones has pledged an incredibly generous gift to inspire—and double—giving from online readers. That's huge! Because you can see that our fall fundraising drive is well behind the $325,000 we need to raise. So if you agree that in-depth, fiercely independent journalism matters right now, please support our work and help us raise the money it takes to keep Mother Jones charging hard. Your gift, and all online donations up $94,000 total, will be matched and go twice as far—but only until the November 9 deadline.

$400,000 to go: Please help us pick up the pace!

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate