20 Mar 2012
- Last week saw a further terse exchange between the European Central Bank and the German Bundesbank over the massive €1000bn expansion of the ECB’s balance through its Long Term Refinancing Operations (LTROs).
- This has been facilitated through a relaxation of collateral standards and a long extension of loan maturities from a few weeks to up to three years. Most of this money has flowed into the weak banks of the Eurozone periphery states. This has proven a valuable short term fix for the Eurozone, but the long term risks are clear enough.
- The Bundesbank’s concern at this is part conventional bankerly prudence and part politics, and important for both reasons. Its own exposure to ECB lending is obviously relevant. Moreover, because the lending in question is partly designed indirectly to fund sovereigns through Eurozone banks, the Bundesbank sees it as stretching the political mandates of both institutions to the limit.
- The tensions in Frankfurt are a symptom of the bigger political problems of the Eurozone. The ECB is storing up large amounts of debt to keep the Eurozone going, and implicitly raising the question of who is ultimately responsible for that debt. Frankfurt’s real problem is that the Eurozone does not yet have a political answer to that question.
The views expressed in this note can be attributed to the named author(s) only.