阻止欧元区债务挤兑的唯一途径

The current turmoil in the eurozone bonds markets shows striking parallels to the situation in autumn 2008. Then, bank depositors had lost confidence in the stability of the institutions holding their assets, and the threat of a bank-run could only be avoided by comprehensive government guarantees for all banks. Today, we are observing a bond-run: a self-fulfilling crisis of confidence in the stability of most eurozone sovereign borrowers. This is driving long-term rates up, so that for more and more countries a temporary liquidity problem is becoming a permanent solvency problem. As regulators still treat government bonds as the safe core of the financial system, this vicious circle threatens the stability of financial institutions not only in the eurozone but also in the rest of the world. It intensifies the recessionary tendencies in the global economy so that in turn the financial situation of governments becomes worse. It’s a perfect vicious circle.

It can be broken only by stopping the bond-run as soon as possible. One way out would be a joint liability for the debt of eurozone members. But as the reaction of Angela Merkel’s government to a recent proposal of the German Council of Economic Experts has shown, the prospects for such a solution are not very good.

An alternative is the Soros plan as outlined in the Financial Times on October 24. The authorities could use the Emergency Financial Stability Facility to enable the European Central Bank to act as a lender of last resort without violating its statutes. The ECB would provide practically unlimited amounts of liquidity while the EFSF guaranteed the ECB against the solvency risks that it would incur. Acting together, they could resolve the liquidity problems facing the banks, and enable fiscally-responsible governments to issue treasury bills for less than one per cent.

Unfortunately the policymakers have not even started to consider this plan seriously. They originally envisioned the EFSF as a way of guaranteeing government bonds. They would have to reorient their thinking if the EFSF were to be used to guarantee the banking system. In July, when the EFSF was first proposed, it would have been large enough to take care of Greece, Portugal and Ireland. Since then, contagion has spread to Italy and Spain and the efforts to leverage the EFSF have run into legal and technical difficulties.

Since the Soros plan would take some time to prepare, in the interim the ECB is left to deal with a rapidly deteriorating situation on its own. On Monday the Bundesbank’s president questioned the right of the ECB to act as a lender of last resort. On Tuesday contagion spread to the rest of the eurozone. The financial markets are testing the ECB and want to find out what it is allowed to do.

It is imperative that the ECB should not fail that test. The central bank must stop the bond run at all costs because it is endangering the stability of the single currency. The best way to do it in the near term is to impose a ceiling on the yield of sovereign bonds issued by governments that follow responsible fiscal policies and are not subject to adjustment programmes. The ceiling could be initially fixed, at say 5 per cent, and lowered gradually as conditions permit. By standing ready to buy unlimited amounts the ECB would effectively turn the interest rate ceiling into a floor from which bond prices would gradually rise without the ECB actually having to buy unlimited amounts. That is what the Swiss government did successfully when it tied the franc to the euro at 120.

Normally central banks fix only short-term interest rates but these are not normal times. Government bonds that were considered risk-free when financial institutions acquired them, and are still treated as such by the regulators, have turned into the riskiest of assets. Italian and Spanish bonds are viewed as too risky to buy with a yield of seven per cent because they are regarded as toxic, and the yield could just as easily rise to ten per cent. Yet the same bonds would be attractive long-term investments in the current deflationary environment, at say four per cent, as long as the excessive risk is removed by imposing a five per cent ceiling on interest rates.

The recent bond-runs have developed because the authorities hold sharply clashing views on the propriety of bond purchases by the ECB. The Bundesbank has been and remains vociferously opposed. But the deflationary threat is real and is beginning to be recognised even in Germany. The statutes of the ECB call for the maintenance of price stability and that requires equal diligence with regard to inflation and deflation. The asymmetry is not in the statutes of the ECB but in the minds of Germans who have been traumatised by hyperinflation. However, the board of the ECB is an independent authority whose independence has to be respected even by the Bundesbank.

The interest rate ceiling should be regarded as an emergency measure. In the medium term it could encourage politicians to abandon fiscal discipline. In Italy, for instance, Silvio Berlusconi will be waiting for Mario Monti to trip up. Therefore the breathing space gained by imposing it should be used to establish appropriate fiscal rules and to devise a growth strategy that would enable the eurozone to grow out of its excessive indebtedness.

George Soros and Peter Bofinger