Even if the leading central banks can resist being forced to monetise private or public debt and deficits to the point that their price stability mandates are compromised, the redistribution over time of a given NPV of seigniorage can have major political and fiscal (redistributive) consequences. Even without either raising the NPV of current and future seigniorage or shifting a given NPV of seigniorage forwards in time, the actions of the central bank as lender of last resort, market maker of last resort and quasi-fiscal subsidiser of last resort can redistribute wealth and income among financial institutions and between financial institutions and the rest of the private sector. The pressure is on for central banks to act in ways that relax the government budget constraint. The question is not whether central banks will be forced to act as quasi-fiscal actors, but the scale, scope, nature and transparency of their future quasi-fiscal interventions.
In the case of the ECB, the game of chicken between the fiscal authorities and the Eurosystem is plain for all to see. With the ECB/Eurosystem intervening to support the P5 debt markets since 10 May 2010, there is no reason for the Euro Group member states to rush the activation of the EFSF. When the stress test results begin to be reported on 23 July 2010, the EFSF will not yet be operational. Between 23 July and the date the EFSF finally becomes operational, any government other than Greece that needs to borrow because it has to recapitalise one or more of its banks but finds itself locked out of the sovereign debt markets can only turn to the ECB/Eurosystem for funds. We predict that the clearly expressed wish of the ECB to exit from its policy of outright purchases of sovereign debt will not be heeded. That exposure to risky sovereign debt is, of course, but a small fraction of the total exposure to private and sovereign credit risk the ECB/Eurosystem has taken onto its balance sheet since August 2007. The losses suffered by the Eurosystem as a result of its exposure to Lehman and to the Icelandic banks clearly demonstrate the risks involved in central banks moving from the provision to liquidity to the supporting the solvency of banks and governments subject to material credit risk. Our analysis emphasises that the Eurosystem can absorb much larger losses without risking its solvency or undermining the effective pursuit of its price stability target. We don’t, however, argue that the resources of the Eurosystem should be used in this quasi-fiscal manner. Openness, transparency and accountability suffer when the central bank is used/abused for quasi-fiscal purposes, and the legitimacy of the institution can be undermined.
Tuesday, August 03, 2010
Europe Anti-Stressed By Seigniorage Back-Up?
FT's Wolfgang Münchau was quite vocal with "A test cynically calibrated to fix the result", and credit analysts at UniCredit were quick to summarize the gap between "stress" and BIS data as follows. Click on charts to enlarge, courtesy of UniCredit.
However, whatever happens, there is a possibility of silent seignoirage by ECB, that makes Buiter to wonder it is not traditional European central banking (H/T FT Alphaville). Again, we are gaming the "Games of ‘Chicken’ Between Monetary and Fiscal Authority: Who Will Control the Deep Pockets of the Central Bank?". As Willem Buiter et al puts it in conclusion on 21st July before the release of results (my emphasis):
Bull market in equities never ended ... for the benefit of Richistan.