ECB Structural Faults & Switzerland Bail-Out of Banks

Euro Symbol

QUESTION: I’m not clear about the purpose of the ECB. Each member country goes to the international capital market and gets a different cost for its bond issuance based on its credit worthiness and other factors. If the ECB’s role is to redistribute the debt loads of stressed countries by taking from the less stressed countries, they havent yet got a mandate for that. So, what else do they do?

Second, I have not yet read on your pages a clear comment on whether you think Switzerland will be part of a European bail-in. Can you please speculate on this point? It seems to me that the usual political pressure by Germany and France on Switzerland will be harder to impose this time round as a result of the double tax treaties signed in the last few years with pretty much all member states. IMO there is no reason for Switzerland to participate in a continent-wide bail in, unless any one of its big banks is in such dire straits that the Swiss govt could use a bail in directive as an excuse to recapitalize that bank.

In the event of a bail in – and my view is the EU will get one – which way are you leaning? The IMF’s 10% tax, or a Cyprus-like bail in? Is it, in your estimation, a bail in of cash deposits only, or of cash and financial investments together?

Thanks in advance for any thoughts on the above.
All the best
C

ANSWER: You are correct. The ECB is not really a central bank because there was no central debt. On top of that, they did not have the ability to create elastic funding. The ECB has limitations set by the politicians that must be increased like the US Debt Ceiling. Yet the EU Commission is trying to manage this looking at the same methods in the USA when they failed to create a national debt through the consolidation of member debts. That also then deprived the central bank of truly being able to maintain a single interest rate. The entire system structure is half-of-this matched with half-of-that and this is why it is collapsing – faulty design.

With respect to the Swiss, they have their own scheme. They should NOT be part of the EU scheme proposed by the IMF and negative interest rates put forth by Larry Summers. The Swiss have already enacted their own bailout scheme and it is similar.