The ECB’s Mysterious Plan to Rescue Italy

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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.

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SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

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Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

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