History Repeats Itself

The European plan to inject € 200 bn euros to IMF is in a standoff for the dates so that the talks will resume in 2012. So far only agreed to € 150 bn due to England declined to participate. On the other hand, the placement of liquidity by the ECB with a duration up to three years was in high demand by both amount and number of participants. The results stand two Spanish and one Italian banks taking advantage of the relaxation of the conditions of the ECB to participate in this mechanism applied for liquidity up to almost 40 billion. Another important characteristic is that emissions of Italian banks (law of December 4) and Spanish now have government backing.

This is important given the financial conditions of those countries that showed improvement in their rate levels from three to ten years. The description of the operation being carried out is as follows:

-The bank issues bonds-The government supports this issuance.

-The bank turned to the ECB and get a 1% loan, refinancing rate in the short term. A very important point here is that if the ECB cuts rates then the rate for these loans would pay down the same way.

-The bank can use that cash to buy say three-year Italian bonds to levels of almost 6 percent. At least the Spanish and Italian governments that are waiting. Italy has already refinanced half its liquidity needs for 2012 and announced a bond issue last end of this week.

It is likely that because there is no impediment to doing so, a part of the liquidity is intended to buy government bonds but possibly not all, as banks also face the issue of increasing its tier 1.

This plan has been defined as a program similar to the Fed in 2008, to do so at this time when the ECB has been so reluctant to make a similar move by the doubts of its effectiveness and that can be compared as an alternative measure government bond repurchase speaks of the increased risk that was taken in recent weeks.

Does history repeat itself?

The background to this program is similar to that of the Fed in 2008 he used his balance to fund cheaper to banks, QE initial goal, and counteract deflationary pressures in the economy, QE2 goal. The result has been a weak dollar and meager growth scenario similar to that of Japan. Why not work in U.S.? For that banks used the money received to increase the credit, instead they invested back into the Fed's credit. Leaving the economy slowed, and projections for future underemployment and high inflation. 

What is different in Europe? First, the assets that fall within the ECB's balance sheet are among other countries' sovereign debt problems. Second, U.S. banks did not face the problem of increasing their capital while they were funding problems. Third, Europe's assets and continuity in the long run the euro is not guaranteed, but is unlikely to disappear. Fourth, the distance between the portfolio of American citizens and the bank bailout is much less than this in Europe due to poor fiscal consolidation in the euro zone. Fifth, the Fed's balance sheet never felt in danger of credit risk, in the case of Europe could be questioned. Finally and most importantly, the mechanism is helping out the problem of financing for banks and countries but it is vital to notice that you are adding a new risk, to understand this the mechanism should be reviewed. It is a private bank debt by issuing them with government support, there is an added risk, the risk of the bank. The money is not tied to finance the country from which the backup. What prevents the bank to take more risks with that money? Isn´t that what happened to Dexia? Isn´t that take us here?