Until a few weeks ago it appeared the eurozone monetary crises would be worsening. Debt was piling up for several key states, and those with the ability to assist lacked the political will to do so. But the European Central Bank (ECB) stepped in with measures that have postponed -- the European crisis.
In fact on Dec. 8 ECB President Mario Draghi still explicitly stated that the ECB could not help: "We have a treaty, and Article 123 prohibits financing of governments."
But the ECB changed its stance just one day later, leaking news that it was prepared to purchase up to 20 billion euros a week of stressed eurozone government debt. That amounts to potentially one trillion euros per year. Not only is that more than enough to buy up all of Italy's debt, it is potentially enough to purchase roughly 80 percent of the 1.25 trillion euros in eurozone debt that comes due in 2012. Even adding in planned new debt issuances only raises the total volume of all sovereign eurozone debt to 1.5 trillion; the ECB could potentially buy up two-thirds of all that by itself.
Thus at a single stroke, Draghi has collapsed the dangerous stresses that were building up in the European financial system because of lenders’ reluctance to provide short-term credits to banks.
What is not admitted, however, is that the new easy-money policy is clearly a maneuver to circumvent the ban in the ECB’s constitution on lending money to Euro zone governments, who were facing a huge problem over the next three months refinancing their maturing bonds – some $600 billion worth.
Seeing the opportunity to do this, as well as shield themselves against the risks of panicky flights by their depositors, the banks have rushed to take advantage of the ECB’s new facility, immediately signing up for the equivalent of $645 billion worth of the loans.
Backstopping the eurozone system even further, the ECB also formally announced Dec. 9 that it was granting all eurozone banks access to unlimited, low-interest liquidity loans with up to a three-year maturity. There have been similar programs offered before, but never with such long terms, such low rates or in such volumes. The liquidity program should prevent any eurozone bank from defaulting on its debts as well as granting them sufficient credit access that all may continue to participate in the sovereign debt markets if they so choose. Banks flocked to the new facility: On the first day, the ECB granted 490 billion euros in such loans.
Barring severe miscalculations on the part of ECB officials managing the purchases or national governments issuing the bonds on the issue of timing, it will be impossible for a eurozone country to default in 2012.
Taken together, the ECB actions have turned the dissolution of the eurozone in 2012 from a near-probability to a near-impossibility. Issues that have been critical in recent months -- the poor and weakening state of European banks, high and rising Italian borrowing costs, the possibility that eurozone states will have their credit ratings slashed, the ability of the eurozone bailout fund to raise large volumes of cash, the utter disinterest of the Chinese and Arab oil states in assisting Europe -- suddenly became irrelevant.
There will still be a painful -- and deepening -- recession. There will still be volatility as the ECB attempts to withhold assistance from time to time to encourage reforms. But the European crisis, at least for now, has departed the field of finance.