The whole sordid deal is founded on unprecedented, unprincipled printing of money not seen in Europe since the last days of the same Adolf. Juergen Stark the former German representative on the board of the ECB resigned some months ago in protest at what he could see coming. AEP writing in Thursday's Telegraph reported it thus:
'Jurgen Stark, the ECB's former chief economist and Germany's board member until two months ago, said the blitz of lending had corrupted collateral standards and risked inflation.
"The balance sheet of the euro system isn't just gigantic in size but also shocking in quality," he said.
Unlimited lending to banks for three years has pushed the ECB's balance sheet to over €3 trillion (£2.5 trillion), overtaking the US Federal Reserve to become the world's most activist bank.
The attack come days after Bundesbank chief Jens Weidmann complained that the ECB's payments system known as Target2 had caused the Bundesbank to build up €547bn of claims on the rest of the system, mostly from the central banks of Greece, Ireland, Italy, and France. He demanded measures to protect German interests.'
Printing money and devaluing currency is the traditional recipe for dictators with financial problems most recently Robert Mugabe in Zimbabwe. It just kicks the can down the road and leave a bigger mess. The Germans know this better than any nation in Europe . Its what the UK and the US are also doing it. It will spark of horrendous inflation eventually here, in the US and the EU. The difference is the UK and US are democracies so the people will eventual restore common sense to monetary policy. The EU is a dictatorship so revolution is inevitable. It will probably start among the impoverished Greek masses.
Having destroyed the CDS system no one in their right mind will lend to Greece, Portugal, Spain etc. Difficult like impossible for a country to grow its economy if no one is prepared to lend them money. The EU solution will be for the ECB to print yet more money to lend to these countries but the more Euros there are the less they are worth and inflation takes off big time. Eventually the Germans will force the Italian running the ECB to put up interest rates which makes the PIGS situation worse and violent revolution more inevitable.
The PIGS have been serial defaulters over the years. That is why I always opposed taking their bonds as BoE collateral. Its different this time was the cry. Famous last words as they say!
For sure people will be reading the covenants on their sovereign bonds much more closely! Once bitten twice shy.
The markets believe the UK has never defaulted on its bonds, usually called gilts. One of my old BoE colleagues assured me in the early days of the bank it did happen but I can't find any record of it so lets just say it never happened. This, the probity and integrity of the English Common Law system plus the Llyods insurance market always paying are the three great foundations of the City. The EU has just destroyed its reputation and the PIGS will pay for it but of course the EU elite will be faultless.
Roll on the revolution!