The ECB as Lender of Last Resort for Sovereigns in the Euro Area

Willem Buiter and Ebrahim Rahbari

No 8974, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper establishes that sovereigns, like banks, need a lender of last resort (LoLR). In the euro area the ECB, with its estimated ?3.4 trillion non-inflationary loss absorption capacity, is the only credible sovereign LoLR. The ECB/Eurosystem has been acting as sovereign LoLR through its SMP purchases of periphery sovereign debt in the secondary markets. It has also contributed, through the deeply subsidised bank funding it provided through the 3-year LTROs, half of a mechanism to purchase periphery sovereign debt in the primary issue markets. The other half has been financial repression requiring banks in Italy and Spain to purchase more of their own government?s debt than they would voluntarily and at below-market yields. We expect that, once Spain and Italy are under troika programmes, the Eurosystem will also lend to these sovereigns indirectly, through loans by the national central banks to the IMF which on-lends them to these sovereigns. We recommend that, to increase its effectiveness as LoLR, the ESM be given a banking license. To reduce the illegitimate and unaccountable abuse of the ECB/Eurosystem as a quasi-fiscal actor, we propose that all its credit risk-related losses be jointly and severally guaranteed/indemnified by the 17 euro area member states.

Keywords: Financial repression; Emu; Quasi-fiscal activities; Seigniorage; Central bank; Lender of last resort (search for similar items in EconPapers)
JEL-codes: E02 E31 E42 E43 E44 E63 G21 G28 H12 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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