Friday, April 29, 2011

Hans-Werner Sinn Reveals The ECB’s Secret Bailout Strategy

"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.

"The PIGS’ own central banks started to lend newly printed money to their private banks, and this money was then used to finance the current account deficit. These funds went to the exporting countries, where they circulated as part of normal transactions. The exporting countries’ central banks responded by reducing their emissions of fresh money to be lent to the domestic economy. In effect, central-bank money lending in exporting countries, above all in Germany, was diverted to the PIGS."

Read the rest, The ECB’s Secret Bailout Strategy, if you are into EZ government finance and where it is headed.




5 comments:

Unknown said...

"The PIGS’ own central banks started to lend newly printed money to their private banks, and this money was then used to finance the current account deficit. These funds went to the exporting countries, where they circulated as part of normal transactions. The exporting countries’ central banks responded by reducing their emissions of fresh money to be lent to the domestic economy."

Nonsense in bold.

Member central bank overdrafts created parallel, shadow base (vertical) money.

Tom Hickey said...

Interesting, kol kas. Would you expand on that for those of us trying to figure out EZ finance.

Unknown said...

There isn't anything to expand, except inconsistency of statement regarding euro zone national central (Bundes)bank reducing their emissions of fresh money to be lent to the domestic economy.

Crediting PIGS NCB's accounts Bundesbank obviously created new base money.

Was it automatically sterilized (by non-sovereign German central bank or German treasury) issuing interest bearing bunds? I don't know, but have a strong suspection it wasn't.

Overdrafts were just left on Bundesbank balance sheet? Probable not. Covered by some sort of paper? What paper?

I suspect some unelected body had an unofficial or semi-official privilege to carry permanent negative balances (to print base euros).

Who?

Tom Hickey said...

Thanks. These are the things we are interested in.

Unknown said...

It seems I wasn't informed enough to comment here, sorry.

Ramanan gave explanation at Moslers' blog:

The Euro Zone institutional setup is an “overdraft financial system” where central banks have large claims on banks unlike Anglo-Saxon setups.

If the receiving bank has sufficient base money, it will reduce its indebtedness to its home central bank at the end of the week or lend funds to other banks. i.e., they will bid less amounts in the next MRO.

By design, banks are permanently indebted to the central bank in the Euro Zone.