Memo to ECB: print money

The only thing that will stop Ireland - and a number of other EU countries - from defaulting on their debts is if the European Central Bank bites the bullet and starts printing money to buy up government debt in Europe in limitless quantities.

David McWilliams, Sunday Business Post, 9 May 2010

This is what we have come to. Anything less and the financial markets will keep selling European sovereign debt.

Today we will hear what EU governments have decided to do. Some kind of EU stabilisation fund is promised. However, unless there is a major move by the ECB to buy government debt, the crisis will deepen.

This must be driving the Germans mad.

However, they went into this euro adventure with their eyes wide open and, now that their worst fears have been realised, it is beginning to look like they are on the hook for the whole thing.

Worse still from the German perspective, their banks, which had been exemplars of prudence for years, are now up to their necks in the government debt of delinquent nations - debt which no one wants. The only buyer of downgraded sovereign debt - Ireland’s included - is the European Central Bank (ECB).

In order to save the finances of Ireland - and the interests of Germany’s banks which are owed €127 billion by Irish banks - the ECB has to do what our government did back in September 2008,when it guaranteed the banks. The ECB now has to guarantee all the government debt of Europe. Anything less and the financial markets will run a mile from all nonGermanic government debts, precipitating mass sovereign default all over Europe.

As a consequence of this realisation, we are facing Credit Crunch Mark II. This is because fear has once again replaced greed, and the contagion has spread. At the beginning of last week, investors were rightly worried about how much sovereign debt was on the books of the large German and French banks. The EU put together its mega-package to bail out the banks that had exposure to Greece, but the markets brushed it off because they realised that the banks were contaminated.

Europe is now back to the situation where the US found itself after Lehman Bros collapsed, because the banks don’t trust each other. Certain European sovereign debt is the ‘sub prime’ of 2010, and the banks won’t lend to each other until they know who has this trash on their books and how much of it they have.

This will cause a double dip, because the new credit crunch will simply squeeze business, and the whole of Europe will face the capital constraints that Irish business faces at the moment.

We will then see reverse contagion: the bond markets drive the money markets which in turn drive the bond markets down further, which begets more capital flight from the bond markets.

The cash will just end up back in the central banks because, without trust, we will end up with loads of money, but nowhere to invest it. So we will have money alright, but no credit. So the money markets are seizing up as well as the bond markets, which are now shut to Greece. The door is also closing on Ireland, Spain and Portugal. But it won’t stop with us.

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