The ECB's Skimmer Bailout

A blog about business and economics.
Dec. 29 2011 9:34 AM

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.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Students Aren’t Going to College Football Games as Much Anymore

And schools are getting worried.

Crowds March in 160 Countries to Demand Action on Climate Change


Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

Why a Sketch of Chelsea Manning Is Stirring Up Controversy

How Worried Should Poland, the Baltic States, and Georgia Be About a Russian Invasion?

Sept. 19 2014 1:11 PM Americans' Inexplicable Aversion to the 1990s
  News & Politics
Sept. 20 2014 11:13 AM -30-
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Tv Club
Sept. 21 2014 1:15 PM The Slate Doctor Who Podcast: Episode 5  A spoiler-filled discussion of "Time Heist."
Brow Beat
Sept. 21 2014 2:00 PM Colin Farrell Will Star in True Detective’s Second Season
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 21 2014 8:00 AM An Astronaut’s Guided Video Tour of Earth
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.