Saving All the World’s Economies:
Chairman Draghi, The 1% Solution to
Save Spain, Europe and the Euro from Financial Disaster
Chairman Draghi, you are doing a truly outstanding job as head of the European Central Bank in dealing with the menacing financial crisis that the European banks and the sovereign member states that employ the Euro as their currency are experiencing. Enormous debt and ongoing deficits have devastated the ability of EU members like Greece, Spain, Portugal and Italy to raise the money they need to function currently and/or to repay their maturing debt obligations. Their sovereign bonds have collapsed and seriously threatened countries like Greece, and potentially others, with impending insolvency. As a consequence, in order to successfully raise any new funds at all, the interest rate these countries are now compelled to pay has risen to prohibitive, unsustainable levels, and the price of their outstanding debt securities has sharply fallen. And since these very same collapsed-in-value debt securities comprise the overwhelming proportion of the investment holdings of the banks of each of these countries, the financial condition of almost all of their major banks is abysmal and in imminent danger of failure with all of the terrible consequences to the economy and the nation that such an eventuality would entail. So clearly these countries cannot allow such a ruinous debacle to occur. Accordingly, these countries seemingly have no alternative but to rescue these “too big to fail” vital institutions. To do that they need to raise even more money to save these banks. And, that increased demand for these additional funds further exacerbates their deficits, their debt and their cost of money, which increasingly jeopardizes their solvency as well.
It’s apparent that the success of the banks and the sovereigns are intimately intertwined. To the extent that the financial condition of these countries can be improved, the value of the outstanding bonds which the banks hold would rise and thus the banks’ financial position would be significantly improved and their governments would not need to step up and spend additional borrowed funds to rescue them. Moreover, if the banks became stronger the markets would recognize that these countries are no longer being strapped with the immense financial burden of saving these banks, and their credit ratings would improve, their interest costs would decline, and their financial condition would strengthen (along with the Euro) since they would have a much lower interest carrying cost to run their countries. The health of Europe would be revived and its economies could once again resume a renewed growth, no longer saddled by the threat of imminent insolvency.
Chairman Draghi, you have already implemented constructive steps that have helped enormously by providing the major banks of Europe with approximately $1 trillion of loans at 1% for a three year period, collateralized by the government bonds they held. By encouraging them to use these borrowings to buy the bonds of their own governments in the open market, you prevented a complete collapse of the price of those bonds and a total banking meltdown and thereby ensured the survival of those sovereign member nations who are in such egregious trouble, and, in the process, you at least temporarily avoided the threat to the Euro itself.
And now helpfully, the European Financial Stability Facility is providing “bailout” funds to countries such as Spain so that they can salvage and, hopefully, resuscitate their banks. But this well intentioned action only burdens Spain with still more debt and doesn’t do much, if anything, to reduce the oppressive cost of carrying their overwhelming debt. Mr. Chairman, I would ask you to consider, and for you to urge your member states to allow you, to provide Spain (and several other at-risk sovereign states) the same 1% financing that you made available to the banks on newly issued debt that you would purchase from them. This would instantly, automatically, lower those countries’ cost of acquiring the money they need (and of course thereby assist in reducing their operating deficits). As they would then use these 1% borrowings to pay off their maturing outstanding bonds, the market would expeditiously, if not instantly, increase the market value of the outstanding bonds that are traded and quoted. Such initiative would thereby effectively and rapidly strengthen the balance sheets of the banks, and ipso-facto repair their financial condition. This would go a long way in solving the dangerous intertwined financial quandary that the fear of the banks and/or the nations are in imminent danger of failing which now prevails and which threatens the very survival of a number of European nations and of the Euro itself.
Mr. Chairman, I urge you do it. Do it now! Provide 1% money to these governments just as our U.S. Federal Reserve has in effect done for the U.S. government (without generating the slightest inflation or any other untoward side effects).
Please do it. Save Spain and the others. Save the Euro. And save the World’s economies from a harrowing financial nightmare.
You said you would do “whatever it takes.” Just your having promised that produced a remarkable rise in confidence and dramatically uplifted all the world’s financial markets. So please do what it takes. Bless you!
-- J. Morton Davis
J. Morton Davis has been a Wall Street investment banker for over 50 years and is the author of Making America Work Again and From Hard Knocks to Hot Stocks. He has authored numerous articles and white papers and is a shareholder in the parent company of The Hill, a Washington, DC political publication.
