Beginning in 2011/12 government bonds and their yields were subject to a mysterious ledgerdemain, which can be regarded as a variant of a stage magician’s trick: levtitating a woman. But in this case the magician did not lift an individual. The levitation affected the time value of the government bonds of “southern” countries in crisis, while their interest rates followed an imperceptibly sinking trajectory. Within only two years the yields have gone down roughly 60 per cent from where they used to be at the height of the crisis.
All the while spreads to german bunds have been closing.
Pundits think, that ECB’s “jawboning” over the bank’s commitment to the euro led to the resurgence of trust, causing this remarkable and unprecedented development. To be true, I do not believe for a second, that this was/is a genuine market phenomenon. And I highly doubt, that the main driver was Draghi’s famous promise, “to do whatever it takes to save the euro”.
The core business of central banks all over the world is to “manipulate” interest rates and I believe this is exactly, what happened. Surprisingly, the ECB managed to do it without buying government bonds in the secondary market and without extending their monetary base (at least doing so only temporarily).
This begets one question: Did the ECB duly announce, what they were obliged to – or could they rely on other mechanisms, maybe even a helping hand from foreign friends?
Without being able to prove it, my best guess would be, that the ECB engaged in using derivatives, probably in collusion with investment banks like Draghi’s former employer Goldman Sachs and other central banks, especially the Fed and the BIS. Canadian analyst Rob Kirby is the foremost publicly known expert on this kind of financial instruments.
It worked in the end, because it saved southern european state financing, southern european banks and and possibly even the euro itself – at the expense of taxpayers, borrowers and savers.
If CBs are able to control yields and interest rates in the short run, the euro crisis was avoidable from the start. But even if it had started on its own, without the help of the ECB, there can be little doubt that the whole thing was managed to achieve a major boost for the integration process.
The first stage stage of this process led to a host of “reforms” and the creation of rescue vehicles. The second stage was the grinding down of interest rates in 2012 and 2013.
This process will very likely end up in permanent interest rates at zero per cent, which in turn will mean free money for everybody. And it will mean, that financial assets, and other assets without user value, will become utterly worthless.
Foto: Ewan Shiels (Collection Ewan Shiels) Wikipedia Creative Commons 3.0