Subject: How the Eurosystems Treatment of Collateral in Open Market Operations Weakens Fiscal Discipline in the Eurozone (and what to do about it).
From: Willem H. Buiter (willembuiter@btinternet.com)
Date: Wed Nov 09 2005 - 15:17:49 EST
Colleagues,
The lead article in todays /Financial Times/ (Wednesday November 9,
2005), ECB targets its problem nations, is a report that the European
Central Bank is about to announce that it will only accept bonds with at
least a single A- rating from one or more of the main rating agencies as
collateral in its Repos and other collateralised lending operations.
This will sharply step up the pressure on Greece (currently single A),
Italy (currently AA-), Portugal (currently AA-) and other fiscally
challenged Eurozone states to get serious about measures to address the
unsustainability of their fiscal-financial programmes.
This measure by the ECB is very much in the spirit of a set of proposals
made in May of this year by Anne Sibert and myself for the Eurosystem to
change the ways the Eurozone sovereign debt is treated when offered as
collateral in Repos. Our proposals did, however, to further than the
ECB appears to be willing to go at this point.
An abstract of the latest version of our note on the subject can be
found here: http://www.nber.org/~wbuiter/sovab.pdf
<http://www.nber.org/%7Ewbuiter/sovab.pdf> .
The full text of our note can be found here:
http://www.nber.org/~wbuiter/sov.pdf
<http://www.nber.org/%7Ewbuiter/sov.pdf> .
Willem H. Buiter
Professor of European Political Economy
European Institute
London School of Economics and Political Science
