Since the beginning of the financial crisis, the central bank has been lending euro area banks as much money as they want, trying to maintain the liquidity — or continual flow of money — that is the lifeblood of the global financial system.
But because the central bank has refused to offer the same easy lending service to countries like Italy and Spain, it is not confronting the euro area’s most fundamental problem — a sell-off of debt from the troubled countries that is pushing their borrowing costs to dangerous levels.
Investors pushed up interest rates on Italy’s debt to record-high levels last week during the political crisis there. And even Monday, after the supposedly calming effect of a new, technocratic prime minister in Rome, lenders were demanding that Italy pay interest rates at levels high enough to eventually bankrupt the country.
In an auction of five-year bonds, Italy had to pay a rate of 6.29 percent, compared with 5.32 percent at a similar auction a month ago.
And Italy’s 10-year bonds, which crested well above 7 percent last week in the secondary market, were still dangerously high on Monday, at 6.77 percent — more than three times what Germany must pay on comparable bonds. In a further sign of investor anxiety about the weaker links in the euro chain, Spanish 10-year bond yields rose above 6 percent for the first time since August.
It is an atmosphere of mistrust reminiscent of the aftermath of the Lehman Brothers collapse in 2008. European banks are demanding higher interest rates for the overnight lending to one another that is essential to keep money circulating.
Still, banks are feeling the pressure to reduce costs and raise capital in the face of Europe’s sovereign debt crisis. UniCredit, the largest Italian bank, said on Monday that it would raise $10.3 billion and eliminate 5,200 jobs in Italy over the next few years as part of a strategic overhaul.
Some banks have even gone so far as to refuse to make overnight loans to other banks at all, fearing others’ vulnerability to the debt of Italy, Spain and other beleaguered countries. For that reason, the central bank has been willing to lend to the banks as needed.
But the biggest fear — the one implicit in all the talk of “contagion” and a potential “Lehman moment” — is not that any one bank will succumb to a liquidity crisis. It is that an entire country might do so, if it can no longer obtain the credit it requires to stay in business.
And at least so far, the central bank has not done the one thing that could help calm that fear: declare that it stands ready to be the de facto lender of last resort to national governments.
If the fear that sent Italy’s borrowing costs to record highs last week becomes a chronic condition, the country could lose the liquidity it needs to keep paying the holders of its 1.9 trillion euro ($2.6 trillion) debt. That would be the Italy Moment — the point at which Rome’s liquidity problem would quickly become everyone else’s.
“We are approaching the point where the E.C.B. has to show its hand and accept its role as a lender of last resort,” analysts at Credit Suisse said in a note to clients Friday. “The question is how much further turmoil is required for it to do so.”
Mario Draghi, the new president of the European Central Bank, which is based here in Frankfurt, has insisted that countries must help themselves by cutting spending and taking steps to make their economies more competitive.
Jens Weidmann, president of the German Bundesbank and an influential member of the central bank’s governing council, went further Monday, saying it would be illegal to use the central bank to solve government budget problems.
“The increasing demand being placed on monetary policy is dangerous,” Mr. Weidmann told an audience of bankers in Frankfurt. “Monetary policy cannot and may not solve the solvency problems of governments and banks.”
What the markets want to hear, though, is not only prescriptions for long-term overhauls but also assurances that the central bank will do whatever it takes to prevent a near-term panic.
This article has been revised to reflect the following correction:
Correction: November 15, 2011
An earlier version of this article mischaracterized the practices of the United States Federal Reserve. It does not buy government bonds directly from the United States Treasury; it does so on the open market.
Article source: http://feeds.nytimes.com/click.phdo?i=faa065f851cede809ed3f74dbe39ff14
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