€1 trillion Rescue Plan
The eurozone was facing a full-scale, potentially devastating, banking crisis. At the Frankfurt headquarters of the European Central bank, it was red alert.
How dangerous where the conditions to eurozone banking market in the autumn and running up to December?.
Benoit Coeuré "In the autumn of 2011, the conditions were very dangerous. European banks were facing very severe difficulties to fund themselves, to access finance, and we were very close from having a collapse in the banking system in the euro area which, in itself, would have also led to a collapse in the economy and to deflation, and this is something the ECB could not accept."
The new boss of the European Central bank, Mario Draghi, made a dramatic and unexpected intervention.
The governing Council decided the following. First, to conduct to longer-term refinancing operations, otherwise called LTROs, with a maturity of 36 months.
This was a banking rescue unlike anything the world had ever seen. The ECB provided more than €1 trillion of
emergency three-year loans at the minuscule interest rate to hundreds of banks.
Was it to prop up the banking system? Was that the main reason that you offered these three-year loans?
Benoit Coeuré "No, the main reason the ECB decided to offer these three-new loans is that the liquidity in the
banking sector is vital for the economy to function. So, the role of ECB is not to prop up the banking sector per
se. We're not working for banks. We're working for the economy the euro area as a whole. "
So, was it, any sense, the beneficial side-effect of the decision to provide these loans that are also, frankly,
save the banking system?
Benoit Coeuré "It may have saved the European banking system, but this was for a purpose, which was to support
Europe and the economy."
But little of the trillion euros has found its way into the real economy. It's gone somewhere else.
David McWilliam's "LTRO was a trash for cash scheme so that the European banks are not forced to pay for their
own reckless decisions. ECB is give them cash at 1% for three years. With that cash they're investing in government
bonds, so bust banks are propping up busting governments with free money on dodgy collateral and calling it success.
Is the money trickling out into the economy? No, on the contrary the money is getting stuck in the balance sheet
of the banks."
We've seen the statistics, your statistics, which shows that they used quite a lot of the new money to lend to the
Italian and Spanish governments. The paradox is this – part of the reason why creditors of the banking system.that the
banks were weak is because they felt that they were too exposed to these governments, and yet the banks are now doubling
up their exposure. Does this make sense?
Benoit Coeuré "Well, we're not doubling up their exposure. They are kind of compensating part of the… Of the exposure
that they had lost or that they had to… They had to cut due to the financial crisis. And so the… The decision of banks
to buy, say, government bonds, it's a business decision."
Willem Buiter "The banks were dying on their feet, many of them insolvent and illiquid, and this LTROs has timed them
instead they do still insolvent, but at least highly liquid banks. In addition, of course, the LTROs has been used to buy
up significant amounts of sovereign debt would not have been more otherwise, Stuart has been useful in keeping the sovereign
show on the road as well, but the hard work still to be done."
By injecting €1 trillion into failing European banks, the ECB was putting an enormous sticking plaster on the haemorrhaging
eurozone. But even the ECB admits that the loans to no more than by time for a proper cure to be found.
Benoit Coeuré "It is a painkiller, but a very powerful one. Now, this period of calm as to be used properly by governments
to fix the underlying issues, the fiscal issues and the competitiveness issues, that European countries are facing."
For two years, there's been crisis after crisis in the eurozone, affecting Greece, Portugal, Ireland, Spain, Italy, and
many of the regions biggest banks. These crises have been met with fire-fighting whips, for a period, have put out the
flames. The big question now is whether the currency union is up for the kind of fundamental reform that's necessary to
ensure its long-term survival.
So, what's necessary for the euro to survive?