The ECB’s Skimmer Bailout

Italian Prime Minister Mario Monti smiles during his end of the year press conference in Rome on December 29, 2011.

Photo by GABRIEL BOUYS/AFP/Getty Images

The European Central Bank appears to have hit on a plan for rescuing Italy that’s so evil I’m somewhat inclined to wish it weren’t working so well:

The ECB’s three-year liquidity provision for euro-zone banks last week also was expected to help finance demand for shorter-dated government debt. The ECB allocated nearly half a trillion euros in three-year loans to banks.
On Thursday, Italy offered a total of €5 billion to €8.5 billion in four bonds: the November 2014 and March 2022-dated benchmark fixed rate bonds, or BTPs, and in the nonbenchmark September 2021 BTP, as well as in the April 2018 floating rate bond, or CCTeu.
Italy sold a total of €7.017 billion in the four bonds paying a yield of 5.62% on the November 2014 BTP, sharply lower than the average yield of 7.89% at the previous sale Nov. 29. It paid a yield of 6.98% on the March 2022 BTP, the current 10-year benchmark, down from 7.56% previously.
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 without needing to go through the muss and fuss of parliamentary appropriations or the raising of inconvenient questions about nationalization. Beyond that, since the ECB hasn’t formally committed itself to anything, the banks’s staff is now in a position to engineer a “fiscal crisis” in Spain or Italy or Portugal (and possibly the small northern european countries as well) any time the pesky elected governments do something the ECB doesn’t approve us. Conversely, thanks to the indirect methods when policy changes lead to amelioration of borrowing costs people won’t write “Italy’s borrowing costs went down because Mario Monti did what the ECB wanted so they brought borrowing costs down” they’ll write things like “yields on the closely-watched three- and 10-year benchmark bonds dropped off amid a positive market reception of Prime Minister Mario Monti’s €30 billion ($38.82 billion) savings measures.” 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.