David Prosser: Sir Mervyn spells it out: the European Central Bank cannot ride to the rescue
Outlook: Anyone who needs a back-to-basics primer on why the European Central Bankcannot simply wade into the eurozone crisis to save the day by buying up all the debt that Italy, Spain and the rest need to issue could do worse than reading the remarks made by Sir Mervyn King yesterday.
Being a "lender of last resort", said the Bank of England's Governor, "is a million miles away from the ECBbuying sovereign debt of national countries, which is used and seen as a mechanism for financing the current account deficit of those countries, whichinevitably, if things go wrong, will create liabilities for the surplus countries".
Sir Mervyn's point, in case that's not clear enough, is that the ECB's backers, the member states of the eurozone, will incur losses if their central bank makes loans on which borrowers subsequently default. The ECB should not be lending to the eurozone's cash-strapped countries because to do so wouldexpose all member states, including those not in financial difficulty, topotential losses.
One can quite understand why governments in countries such as Germany might be prepared to accept the risk. For Angela Merkel, lending via the ECB is a much less visible commitment than asking German taxpayers to subsidise the periphery directly, even if theexposure is really no different. But it really should not be the job of the European Central Bank – or any other central bank for that matter, which may be why Sir Mervyn was so keen to offer support yesterday – to step in where national governments are afraid to tread for political reasons.
What does that mean for the current impasse in the eurozone? Broadly, it means over to you Ms Merkel. Italy's new Prime Minister Mario Monti and his technocratic cabinet will no doubt do their best to convince the markets that the eurozone's third biggest economy can get on top of its debt pile. In Spain, we will know more about the outlook following the general election this coming weekend.
In both cases, however, bondmarket investors will not lend money at affordable rates unless a credible back-up plan is put in place – a facility to repay them in the event that Italy and Spain prove unable to do so. The ECB, for the reasons Sir Mervyn, pictured, outlined yesterday, cannot be that facility, which leaves only the European Financial Stability Fund. And while it may be able to attract foreign support, one can hardly expect the Chinese, say, to put their hands in their pockets, unless the strongest members of the eurozone have already done so.
And so the brinkmanship continues. Both Spain and Italy have very significant funding requirements in 2012. Ms Merkel, meanwhile, faces a general election in 2013. Is she prepared to put more German money on the line in the knowledge that doing so will damage her chances of re-election a few months later? If not, Ms Merkel may yet be paying for her campaign materials in deutschmarks rather than euros.
Revealed: Stunning new images show gold-plated, ultra-luxurious Riyadh metro station that Saudi king has ordered to be built
World news in pictures
Far-right French historian, 78-year-old Dominique Venner, commits suicide in Notre Dame in protest against gay marriage
Oklahoma tornado latest: Obama pledges support for 'as long as it takes' to rebuild the suburb of Moore
Video emerges of Pope Francis reportedly performing an exorcism
- 1 Gay couple beaten in park urge MPs to moderate language on gay marriage
- 2 Swedes set up 'ultimate Viking movie'
- 3 After woman sells virginity for $780,000, here are the results of our prostitution survey
- 4 China agrees to impose carbon targets by 2016
- 5 Far-right French historian, 78-year-old Dominique Venner, commits suicide in Notre Dame in protest against gay marriage
BMF is the UK’s biggest and best loved outdoor fitness classes
Win anything from gadgets to five-star holidays on our competitions and offers page.
iJobs Money & Business
£850 - £1000 per day: Orgtel: Programme Change Manager - Banking - London - £8...
£180 - £230 per day: Orgtel: Operations Analyst - Leading Bank in the City of ...
£500 per day: Orgtel: A top tier banking client urgently requires Finance Busi...
£425 - £550 per day: Orgtel: Senior Finance Project Manager - £550 - Bristol -...