The actions of the European Central Bank and the “Fed” [1]

Beginning in June 2011, the European banks entered a highly critical phase. Their situation was almost as serious as on 15 September, 2008, after the failure of Lehmann Brothers. Many of them were threatened with asphyxia because their massive needs for short-term financing (a few hundred billion dollars) were no longer being met by the American money market funds, who felt that the situation of the European banks was decidedly becoming more and more risky [2]. The banks were in danger of being unable to honor their debts. That is when the ECB, following an emergency European summit held on 21 July, 2011 to deal with the prospect of a series of bank failures, resumed massive purchasing of Greek, Portuguese, Irish, Italian and Spanish public-debt securities from the banks in order to provide cash flow and relieve them of a part of the securities they had greedily purchased during the preceding period. But it was not enough to prevent the banks’ shares from continuing to drop. The executives of these banks spent August on a tightrope. The decisive action that kept the European banks afloat was the extension by the ECB, beginning in September 2011 and in consultation with the Fed, the bank of England and the Swiss National Bank, of an unlimited line of credit. Banks that were starved for dollars and euros were put on life support. They began to breathe again ; but the treatment was insufficient. Their share prices continued to plunge. Between 1 January and 21 October, 2011, the price of shares in France’s BNP Paribas dropped 33.3%, and in Deutsche Bank 28.8% ; Barclays dropped 30.5% and Crédit Suisse 36.7%, and Société Générale plummeted 52.8%. The ECB was forced to bring out its heavy artillery – an LTRO (Long Term Refinancing Operation). Between December 2011 and February 2012, it lent more than 1,000 billion euros for a duration of 3 years at an interest rate of 1% to just over 800 banks.

The Fed had been doing no differently since 2008, at an even lower official rate. A July 2011 report from the GAO (US Government Accountability Office) revealed that the Fed has lent 16,000 billion dollars at below 0.25% [3]. The report shows that in pursuing such policies, the Fed did not adhere to its own prudential rules and did not inform Congress. According to an investigative commission of the United States Congress, there was clearly collusion between the Fed and the major private banks : “The CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Moreover, JP Morgan Chase served as one of the clearing banks for the Fed’s emergency lending programs.” [4] According to former French Prime Minister Michel Rocard and economist Pierre Larrouturou, based on research done by the New York financial agency Bloomberg, the Fed lent part of the amount mentioned above at a rate that was even much lower : 0.01%. Michel Rocard and Pierre Larrouturou stated in the daily Le Monde : “After studying 20,000 pages of various documents, Bloomberg shows that Federal Reserve secretly lent the troubled banks the sum of 1,200 billion at the incredibly low rate of 0.01%. [5] They ask the question : “Is it normal in a crisis for the private banks, who are usually financed at 1% by the Central Banks, to benefit from a rate of 0.01%, when in times of crisis certain States are obliged to pay rates 600 or 800 times higher ?”

The major European banks also had access to such loans from the Fed until early 2011 (Dexia received a loan of 159 billion dollars [6], Barclays $868 billion, the Royal Bank of Scotland $541 billion, Deutsche Bank $354 billion, UBS $287 billion, Crédit Suisse $260 billion, BNP-Paribas $175 billion, Dresdner Bank $135 billion and Société Générale $124 billion). The fact that this financing of European banks via the Fed dried up (in particular due to pressure from the US Congress) was one reason why the American money market funds also began shutting off the spigot of loans to the European banks as from May-June 2011.

 What were the effects of the ECB making 1,000 billion euros available to the banks at 1% ?

In 2012, the banks used the new flow of cash to make massive purchases of public debt securities in their own countries. Let’s take the example of Spain. The Spanish banks borrowed 300 billion euros from the ECB at 3 years at a rate of 1% in the LTRO framework [7]. With part of that money, they greatly increased their purchases of debt securities issued by the Spanish authorities. The evolution is quite striking : As of late 2006, the Spanish banks only held 16 billion euros of public securities from their own country. In 2010, they increased their purchases of Spanish public securities, to a level of 63 billion. In 2011, they again increased their purchases, and their holdings in Spanish securities amounted to 94 billion. But thanks to the LTRO, their acquisitions literally exploded – the volume of their holdings doubled in a few months to reach 184.5 billion euros in July 2012. [8] Clearly the operation was very profitable for them. Whereas they were borrowing at 1%, they could buy 10-year Spanish securities with an interest rate that varied between 5.5 and 7.6% in the second semester of 2012.

Now let’s look at the example of Italy. Between late December 2011 and March 2012, the Italian banks borrowed 255 billion euros from the ECB within the LTRO framework [9]. Whereas in late 2010 the Italian banks held 208.3 billion euros in bonds from their country, that amount increased to 224.1 billion in late 2011, a few days after the start of the LTRO. Then, they used the credits they received from the ECB to make massive acquisitions of Italian securities. In September 2012, the total value of the securities amounted to 341.4 billion euros [10]. As in the case of Spain, it was a very profitable operation – they borrowed at 1% and by purchasing 10-year Italian securities, they obtained an interest rate that varied from 5% to 6.6% in the second semester of 2012.

The same phenomenon was repeated in most euro zone countries. A part of the assets of the European banks were relocated to their countries of origin. Concretely, what happened is that the share of public debt of a given country held by the financial institutions in that same country increased very perceptibly during 2012. That development reassured the governments of the euro zone, in particular those of Spain and Italy, since they found that they had less difficulty in selling their bond issues. The ECB seemed to have found the solution. Lending massively to the private banks saved them from a critical situation and spared certain governments the pain of launching new bank bailout plans. The money lent to the banks was used in part to purchase public debt securities from euro zone States. This stopped the increase in interest rates in the most fragile countries and even resulted in lower rates for certain others.

It’s easy to see that, from the point of view of the interests of the populations of the countries concerned, a very different approach should have been adopted – the ECB should have lent directly to the governments at less than 1% (as has it done for the private banks since May 2012), or even without interest. The banks should also have been socialized under citizen control.

Instead, the ECB put the private banks on life support by extending an unlimited line of credit at a very low interest rate (between 0.75 and 1%). The banks used this windfall of public financing in different ways. As we just saw, on the one hand, they purchased sovereign-debt securities from countries like Spain and Italy who, under pressure from the banks, granted them high rates of remuneration (between 5 and 7.6% at 10 years). On the other hand, they deposited a part of the credit that had been extended to them by the ECB… in the ECB ! Between 300 and 400 billion were deposited by the banks with the ECB as call money at a rate of 0.25% in early 2012 and 0% since May 2012. Why did they do this ? Because they needed to show other bankers and private suppliers of credit (money market funds, pension funds, insurance companies) that they have ready cash to face the potential explosion of the time bombs that are on their books. Without this, potential lenders would shun them, or else demand very high interest rates. With the same objective of reassuring private lenders, they also purchased sovereign bonds from governments who are free of risk in the short or middle term – Germany, Holland, France, etc. The demand was such that 2-year bonds of the governments in question sold at a rate of 0% or even with a slightly negative yield (not counting inflation). The rates paid by Germany and the other countries that are considered financially sound dropped considerably thanks to the ECB’s policy and the increasing seriousness of the crisis affecting the periphery countries. This resulted in a flight of capital from the European periphery towards the center. German securities are so sure that in need of cash, they may be negotiated overnight without loss. Banks acquire them not for the purpose of earning money, but to have deposits or highly liquid securities in the ECB that are immediately available, so as to create the impression (often a false one) of solvency and to deal with unforeseen events. They make profits by lending to Spain and Italy, and that averages out certain losses they might take on the German securities. It is very important to stress the fact that the banks did not increase their loans to households and companies, whereas one of the official goals of the ECB loans was to increase such credit in order to stimulate the economy.

 What do the elites feel about the ECB ?

For a moment, let’s judge the ECB’s actions from the point of view of the wealthiest 1% of the population. The official discourse insists that the ECB has made a successful transition between its former president, France’s Jean-Claude Trichet, and the new president, Mario Draghi [11], a former governor of the bank of Italy and former Vice-President of Goldman Sachs Europe. The ECB and the leaders of the main European countries negotiated a reduction of the Greek debt by convincing the private banks to accept a “haircut” of approximately 50% on their holdings and by getting the Greek government to undertake a new, radical austerity plan that includes massive privatizations and abandon of a large part of the country’s sovereignty. As from March 2012, representatives of the Troika took up permanent residence in ministries in Athens in order to keep a close watch over the country’s accounts. New loans to Greece are granted through an account directly controlled by the European authorities, who thus have the power to block them. What takes the cake is that new Greek debt issues are no longer under the jurisdiction of the Greek courts ; the new bonds are subject to English law, and any disputes between the Greek State and private creditors will be settled in Luxembourg [12].

That’s not all : Under pressure from the ECB and European leaders, Giorgos Papandreou’s PASOK government, which was very docile but more and more unpopular, was replaced – without election – by a New Democracy-PASOK national unity government, with key roles given to ministers who are directly linked to the banking world.

To complete the picture of the situation, there were three other key advantages for the ECB and the European leaders :

1. Silvio Bersluconi was forced to resign and was replaced by a government of technicians, led by Mario Monti, a former European commissioner who is very close to the banking world and capable of imposing an extension of neoliberal policies on Italy [13].

2. In Spain, the head of the government that has been in place for a few months, Mariano Rajoy of the People’s Party, is also preparing to radicalize the neoliberal policies of his predecessor, Socialist José Luis Zapatero.

3.The European leaders [14] have agreed on a stability pact that will institutionalize budgetary austerity, abandonment by the Member States of more of their national sovereignty, and further submission to the logic of private capital. Finally, the European Stability Mechanism (ESM) will soon enter into force and will make it easier to bail out States and banks [15] during inevitable future banking crises, and also EU Member States in need of financing.

These various examples show that European leaders serving the interests of capital have succeeded in marginalizing the legislative powers even further by simply riding roughshod over democracy. In any case, how can we call “democracy” a system under which voters who want to massively reject austerity can no longer express their choice through their vote, or in which the political force of the vote is canceled because the result is not in conformity with the wishes of those in power – as in 2005 in France and in Holland following the rejection of the European Constitution Treaty, or in Ireland and Portugal after the elections in 2011, or again in France and Holland after the 2012 elections. Everything is being set up so that the room for manœuvre of the nationa [16]l governments and public authorities is limited by a European contractual framework that is more and more constraining. This is an extremely dangerous tendency – unless, of course, those governments, with the support of their populations, decide to disobey.

So if we put ourselves in the place of Mario Draghi, the main European leaders, and the banks, we can see that they must be extremely pleased with the events of March-April 2012. Everything seemed to be succeeding.

 The limits of the success of the ECB and the European leaders

Then the dark clouds began to gather. The trouble began in May 2012, when Bankia, Spain’s fourth-largest bank, headed by the former Managing Director of the IMF, Rodrigo de Rato, announced its state of virtual insolvency. Depending on the source, the Spanish banks needed to be recapitalized to the tune of somewhere between 40 and 100 billion euros, and Prime Minister Mariano Rajoy, who did not want to ask for a bailout from the Troika, was in a very difficult position. [17] Added to that was a series international banking scandals – the one involving manipulation of the Libor, the London interbank lending rate, being the most sensational – involving a dozen major banks. The Libor scandal came on top of revelations of reprehensible conduct by HSBC involving laundering drug money and other criminal dealings.

In France, a majority of voters rejected Nicolas Sarkozy. François Hollande was elected on 6 May, 2012 ; but that was not really a disquieting development for international finance, since the French Socialists, like the other European Socialist parties, can be counted on to show pragmatism and to continue austerity policies. Still, the French people are unpredictable and capable of various types of excesses once they decide that a real change is needed...

In Greece, the situation is more difficult for the ECB, since SYRIZA – the radical-Left coalition who promise to abrogate the austerity measures, suspend reimbursement of the debt, and defy the European authorities – could well win an electoral victory. For the champions of European austerity, such an occurrence must be prevented at any cost. On the evening of 17 June, 2012, there was great relief at the ECB, in Europe’s seats of government, and in the boardrooms of the major corporations : The rightist party New Democracy was ahead of SYRIZA. Even France’s new Socialist president expressed satisfaction with the results. The following day, the markets breathed again, and austerity, stabilization of the euro zone, and the balancing of the accounts of the private banks could continue.

Eric Toussaint