03.09.2012 0

Europe kicks the can, following the American way

By Bill Wilson — Is the European debt crisis over?

Since the latest €130 billion bailout of Greece was agreed to on Feb. 21, rates on Italian and Spanish debt have seemingly stabilized, dropping from 5.44 percent and 5.11 percent respectively to 4.8 percent and 5.05 percent.

Granted, yields on Greek debt are still climbing upward. 10-year bonds over 36 percent. 1-years are over a gargantuan, ludicrous 1,020 percent.

That is owed largely to the nature of the Greek deal. Although €140 billion of Greece’s €340 billion debt has been guaranteed by the European Financial Stability Facility (EFSF), International Monetary Fund (IMF), and the European Central Bank (ECB), private holders of the remaining €200 billion have “voluntarily” taken a 50 percent haircut, a technical default.

That alone likely explains the rising pressure on Greek yields. But what about the dropping Italian and Spanish rates?

While those have dropped off some since the Greek bailout was agreed to in Feb., the peaks in rates for Italy were actually in early Jan. at 7.16 percent for Spanish debt were actually in late Nov. at 6.7 percent.

That was about when the ECB was stepping in with a massive long-term refinancing operation: over €1 trillion of loans at about 1 percent to financial institutions to purchase higher-yielding government debt.

So, the “solution,” such as it is, was for the central bank to print hundreds of billions of euros to lend to banks, who in turn lent it to the governments, rolling over hundreds of billions of Italian and Spanish debt.

Not that surprising. In the U.S., we’ve been doing that for years. Today, financial institutions — privileged primary dealers — can borrow at close to zero percent from the Federal Reserve and use it to lend to the federal government, earning about 2 percent, the current 10-year yield.

It is a mutually beneficial relationship for those involved, since it is a license to literally make money. Government gets practically unlimited financing for its profligate spending habits, while banks get to make billions of guaranteed profits. For a central planner, that is a pretty good deal, since there are no restrictions on their many whims.

But it involves serious crimes against the people.

In Europe and in the U.S., it has debased the euro and dollar into mere Monopoly money. It has blown up the balance sheets of both the ECB and the Fed. Here, the central bank owns $1.65 trillion of U.S. treasuries — over 10 percent of the $15.5 trillion national debt. This has resulted in incipient inflation, particularly for staples like food and energy.

In Europe, the ECB has acquired over €219 billion of sovereign debt on secondary markets, despite an explicit Lisbon Treaty prohibition against subsidizing government borrowing, and accepted billions more as collateral in making further loans. This has literally smashed the concept of the rule of law, calling into question the original agreement that brought the euro into existence.

Over time, the ECB has weakened its collateral requirements. It has taken sick banks and turned them into zombies who either do as they’re told or die. Here, the situation is not much better. The dollar’s saving grace — for the moment — is its status as the world’s reserve currency.

But with an ever-escalating national debt burden that is never paid down, requiring ever-larger central bank infusions of fresh money, the dollar’s overall prominent position is weakening over time.

And it won’t last. In the end, just as similar central planning by all-knowing overlords wrecked the Soviet bloc with a debt that could not be repaid, so too will it destroy Western Europe and North America when the bill comes due.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

Copyright © 2008-2023 Americans for Limited Government