Europe’s leaders have proven that they will do whatever it takes to hold the Eurozone together.
The European Central Bank (ECB), along with others around the world, has dramatically increased the size of its balance sheet in order to prevent a repeat of the 2008 credit crisis. By early March it’s estimated that the ECB will hold €3 trillion worth of asset-backed securities, public sector and corporate bonds, bank bonds and other securities.
A Chart Showing The Expansion Of Central Bank Balance Sheets Since The Start Of The Global Financial Crisis
Chart courtesy of DER SPIEGEL
In its latest attempt to prevent a systemic banking collapse, the ECB came up with its LTRO programme, or Long Term Refinancing Operation. The scheme has allowed the central bank to distribute more than €1 trillion ($1.3 trillion) in three year loans to around 800 European banks.
Upon receiving this freshly printed money, the banks buy up high-yielding Spanish, Italian and Greek debt. It’s a clever scheme. The bank like it because they get to pocket the difference between the 1% LTRO rate and the 6% paid on Italian bonds, which helps them recapitalise their balance sheets. And Europe’s leaders like it because it helps keep bond yields low and prevents (or rather I should say postpones) a debt default from Greece, Portugal, or any of the other struggling Eurozone nations.
To quote best-selling author, and financial market commentator, John Mauldin, “European politicians are totally committed to keeping the Eurozone together. It’s a bad idea, but they are committed to it and they are willing to spend everybody else’s money, especially German money to do it.”
The problem with creating new debt to solve a problem of too much existing debt, is that sooner or later you run out of willing lenders. When that happens you have to create the money out of thin air and then you are well on the way to destroying your currency. This is the prospect faced by all fiat currencies today – hence the need to be invested in real, tangible assets, such as gold, silver and oil.