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ECB Ponders Buying PIIGS Toxic Debt

Interest-Rates / Eurozone Debt Crisis May 09, 2013 - 10:49 AM GMT

By: Mike_Shedlock


In an effort to stimulate small and medium (SME) lending the ECB considers acquiring banks toxic debt of the periphery. Via mish-modified translate from Spanish Libre Mercado.

The European Central Bank (ECB) could "soon" start buying bad debts of Southern European countries in an attempt to end the fragmentation in the eurozone and boost funding to SMEs, as confirmed by the German ECB representative Jörg Asmussen.

"It's part of the debate on lending to SMEs," Asmussen said when asked about the measure, which was unveiled by the German newspaper Die Welt. The ECB has an "open mind" to do everything "within our mandate" to solve this problem, Asmussen explained in an appearance before the Economic Affairs Committee of the Parliament.

The goal, the German banker continued, is "revive the market asset-backed securities, particularly those backed by loans to SMEs, of course with strict supervision." In any case, the ECB representative stressed that "liquidity is not what is preventing banks from lending" but "the lack of capital."

For his part, Vice President of the Commission responsible for Economic Affairs, Olli Rehn, has said that in "many parts of southern Europe" live SMEs "financial trap". "We are facing severe financial fragmentation in Europe, where similar types of companies must pay for credit interest rates significantly higher in southern Europe compared to the core countries," said Rehn.

"It is very important that each European institution, within its mandate, work to overcome this funding and liquidity trap in southern Europe," he insisted. "We have to complete the repair of the banking system as soon as possible, ensure its capitalization, build a banking union and resolve the liquidity trap," stated the economic vice.

Asmussen seeks a complete banking union "as soon as possible" to break the "negative interaction" between banks and states and prevent recurrence of crises such as Cyprus.

"The Cypriot case has been a salutary reminder of the importance of establishing a banking union as soon as possible. Only then will we be able to break the negative interaction between states and their banking systems," said the representative of the ECB during a hearing in the Economic Affairs Committee on Cypriot case.

The German banker also stressed that the EU must "urgently" a framework for resolution of financial institutions that include "a set of clear and known in advance" about how the losses will be shared among the different creditors, establishing a "preference for depositors".

"The new framework should put depositors at the top of the hierarchy of creditors and ensure that the role of deposit insurance funds in the settlement is limited to guarantee to depositors" with less than 100,000 euros.

The ECB also wants a unique mechanism of resolution "with a strong central authority to take impartial decisions to minimize time and costs of the resolution." This authority should have a resolution fund that has temporary public support and is "fiscally neutral".

Scary Stuff

Talk of "temporary public support" ought to scare everyone in Germany to death. Heck, this kind of talk should scare the UK to death as well. It serves as a warning signal for the UK to exit the EU while it can. 

Fiscally Neutral?

Supposedly the proposal will have a "resolution fund" that is "fiscally neutral". Hmm... Neutral to who? Taxpayers?

Banking union? Who does that benefit?

Within Mandate?

Asmussen says the ECB has an "open mind" to do everything "within our mandate" to solve this problem.

Since when is it under ECB mandate to buy toxic debt of Southern European countries to stimulate SME lending?

Uncertainty Principle Yet Again

Seems to me banks lent too much money already to SMEs and are chocking on losses. Is it within ECB mandate to provide capital to failing institutions?

I think not. Nonetheless, the Fed Uncertainty Principle is at play once again. Simply substitute ECB for Fed in the following corollary.

Uncertainty Principle Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2013 Mike Shedlock, All Rights Reserved.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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