ECB Independence Workaround - Lend To IMF And Turn A Blind Eye

Tyler Durden's picture

The political pressure on the ECB (and implicitly the Bundesbank's oh-so-stubbornly sensible and correct bankers) to just-print-baby-print is growing by the hour (or down-tick in BTPs and OATs). The cacophony of long-only strategists, Keynesian central bankers, and desperate (under speculative attack) politicians has perhaps reached a crescendo as it appears (from a Reuters article) that the ECB has found a workaround. By lending to the IMF, who are able to do pretty much whatever they want with regard to on-lending and primary issuance support, the ECB denizens can maintain their tough no nonsense anti-monetization stance while providing a leveragable IMF with more support for whatever leveraged buying they deem necessary (cough France Italy Spain cough). And all this as the IMF scrambles to replace its European Director - what could possibly go wrong?

Reuters: ECB could lend to IMF for euro-zone rescue

Euro zone and International Monetary Fund officials have discussed the idea of the European Central Bank lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest euro zone sovereigns, officials said.

 

"Some discussions on this have taken place... It could be one way of getting around the legal restrictions on the ECB," one official with knowledge of the talks said. A second official said ECB lending to the IMF was being explored.

 

The idea appears as the rising severity of the euro zone debt crisis, which now threatens to engulf Italy, or even France, makes policymakers desperate to get the ECB, with its limitless resources as a central bank, more involved in the rescue efforts to buy governments time for reforms.

 

Economists say only the ECB now can offer a credible guarantee to markets, as plans to leverage the firepower of the euro zone bailout fund EFSF to 1 trillion euros were unlikely to fully materialise or, even if they do, to be sufficient.

 

But EU law forbids the ECB to finance government borrowing. The bank has repeatedly said it would not become the lender of last resort to euro zone governments, which should first of all change policies that created large public debt and slow growth.

 

France has openly called for the ECB to get more involved by issuing the euro zone bailout fund -- the European Financial Stability Facility (EFSF) -- a banking licence that would allow it to refinance itself with the ECB liquidity operations.

 

Yet Germany fiercely opposes such an idea, fearing it would lead to financing government deficits, endanger the ECB's independence and in the end lead to higher inflation, which would make all euro zone citizens poorer.

 

ECB INDEPENDENT, BUT HELPING

 

Policymakers have discussed, therefore, how to get the ECB involved in crisis-fighting without endangering its independence. Lending money to the IMF, rather than any euro zone government, could achieve that, officials said.

 

"It is just an idea, at least for now," a euro zone official said.

 

Article 23 of the ECB statute says that "the ECB may conduct all types of banking transactions in relations with third countries and international organisations, including borrowing and lending operations".

 

The IMF could then use the ECB money to finance various rescue operations in the euro zone like bailouts, precautionary credit lines, on its own, or in cooperation with the EFSF.

 

"It is doable," a second euro zone official said. Two further euro zone officials said they had heard of the idea.

 

Money from the ECB to the IMF would also help alleviate criticism from non-euro zone IMF member countries that all of the fund's resources -- which come from all IMF members -- are being used up for the relatively rich euro zone.

 

To prevent a collapse of the euro zone debt market, the ECB has been buying government bonds on the secondary market, saying it was doing so to improve the transmission of its monetary policy, which highly volatile bond markets were distorting.

 

It has stressed however, that such purchases were limited in scope and were also temporary -- a half-hearted approach in the eyes of the market.

 

While it may be designed to keep the pressure on governments to implement reforms, euro zone policymakers privately say it is also the costliest possible way of dealing with the crisis.

 

"If the ECB told the market it would buy euro zone bonds for as long as it takes, or up to some big limit, who in the market would want to test that? But if they do it bit by bit, markets keep coming back," a third euro zone official said.

And Peter Tchir's, of TF Market Advisors, take on this debacle:

Why would the IMF borrow money from the ECB rather than just get money from its members?  Especially now that the BRIC nations have increased their quotas?

Well the obvious reason is that the BRIC nations have only talked about increasing their commitment, and haven't actually done so.

Maybe it has a lot to do with the fact that the member states have no money?  Maybe someone actually realized that with the US up against the debt ceiling we don't have cash to give the IMF.  I'm sure our guarantees don't count against our debt limit, so the IMF can borrow from the ECB rather than drawdown on our commitments.  That seems less positive.  Maybe they also realized that the Eurozone including the PIIGS are big contributors and they definitely have no money to give to the IMF, so again, borrowing is a better option.  The IMF borrowing from the ECB just seems bizarre.

The ECB would clearly just print money.  So much for prudence and caution.  Can the ECB actually lend to the IMF under its existing guidelines?  Maybe the World Bank (which is a bank) can borrow from the ECB under their charter, and then the World Bank could lend to the IMF, which could then use that money and some SDRs to create TLF's (temporary lending facilities) to NUA (nations under attack)?

The ECB may be considering using the IMF because the IMF can demand collateral or better terms on its loans than the ECB?  The IMF does try and become a senior lender.  If that is the case, than this can actually be really bad for existing debt holders.  Especially if it is coming as a realization that SMP's have been totally useless in sustaining the crisis and have done nothing but stuff the ECB's balance sheet full to the gills with weak assets and helped some quick traders make a nice profit.

Be very careful with this rumor.  As with so many other half baked "plans" (found on a discarded cocktail napkin after a 3 martini lunch) , the likelihood of this occurring seems low, and I highly doubt it will have the impact people want or hope.

In the meantime, new corporate bond issues and IPO's consider to struggle.  In spite of knee jerk reactions, the market seems very very cautious.