Central Bankers the Only Defense Against Apocalypse: Economist
CNBC EMEA Head of News
After a weekend of talks at the International Monetary Fund’s annual meeting in Washington over how best to deal with the euro zone debt crisis, we appear no closer to a resolution.
Under pressure from the United States and IMF to act, European politicians do not appear ready to take immediate action, with German Chancellor Angela Merkel warning on Sunday night that allowing Greece to default would destroy investor confidence in Europe.
Public opinion in Germany remains a major obstacle to any major increase in support for Greece, the EU banking system or the bond markets of Italy and Spain, but one economist believes this weekend saw a realization that more needs to be done.
“We have moved forward over the weekend withtalk of leveraging the European Financial Stability Fund and more from the ECB,” said Holger Schmieding, the Chief Economist at Berenberg Bank in an interview with CNBC on Monday.
“There appears to be a viewing forming that we need more firepower,” said Schmieding.
The problem according to Carl Weinberg, the chief economist at High Frequency Economics is the lack of urgency in Europe.
“Greece does not have several weeks to go before it runs out of cash. Markets are precipitating a banking crisis already. Fiscal policy is responding too slowly and incohesively to the debt crisis in Europe,” said Weinberg, who now believes the central banks are now the last line of defense against a major crisis.
“Central banks can provide cash to banks by buying bonds from the public, increasing banks’ reserves overall,” he said.
Via printing money central banks can provide all banks with liquidity, according to Weinberg, but only after a default, when the majority of assets held by Greek banks would be Greek government debt which would be unable to be used as collateral via ECB repo operations.
“That would leave Greek banks high and dry,” said Weinberg in a research note.
“What the central bankers can do in advance of the failure of Greece is move the risk onto their own balance sheets, off the balance sheets of the banking system,” he said.
This could involve buying all Greek government bonds according to Weinberg who believes such a move would not only fix the prices Greece is being forced to pay to service its debt but also remove the entire risk of bank failures.
Such a move would cost $250 billion euros if the ECB paid at face value. Weinberg believes time is not on the policymakers’ side
“At this point, our base case is that Greece will default within weeks,” he said.