In the Eurozone, any government can finance itself by issuing bonds to commercial banks. These banks can then have those banks borrow, using the bonds as security, at the European Central Bank…..in return for more Euros. The commercial banks do well because the Trichet Toytown charges them very little for those loans, while the governments get lots more money – and carry on living beyond their means.
We are three months now into the Greek meltdown, and Trichet’s ECB still hasn’t done anything about this. In fact, the ECB and the EU put huge pressure on each nation to bail out any commercial banks pulling this stunt which get into trouble. They are, you see, all members of the Bankers’ Amelioration Society, and the needs of this club must never be ignored.
So when new members join the Eurozone, their banks win access to a large amount of cheap financing – knowing that they’ll be bailed out whatever happens. They too can massively expand their balance sheets…in order to lend rashly with poor security to bad credit risks.
Small wonder that, until Greece, everyone wanted to be a member of the Eurozone. And no surprise at all that this insane whirlygig of money, bonds, more money, daft lending and fairytale budgeting is crashing back to earth.
But the commercial banks involved in the Bonds-ECB-Money back alchemy have nothing to fear, even if they’re from outside the Eurozone. For this is only what’s called a ‘carry’ trade. They face no risks – in fact, no consequences – at all.
All aboard for the Flying Circus….