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ECB a bad bank

Henrik Böhme / rsOctober 2, 2014

The ECB is playing its last cards in the fight against the eurozone crisis. The freshly announced purchase of junk bonds is a dance on a volcano, says DW's Henrik Böhme.

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Euro currency symbol
Image: Fotolia/K.F.L.

At times, the ECB's governing council leaves its headquarters in Frankfurt and holds a meeting somewhere else in the eurozone. The latest meeting took place in Italy, the home country of ECB Chief Mario Draghi.

It could have been a coincidence that it took place in Naples - the city at the foot of the Vesuvius volcano. Or highly symbolic. It is nothing short of a dance on the volcano that the lender is inviting us to.

Europe's economic woes have now lasted for five years. Since the outbreak of the global financial crisis, the old continent has been in the doldrums. The national economies of the eurozone have not yet reached the levels they were at before the Lehman disaster. Especially shocking is the level of unemployment in many countries. And also the national debts that have risen to unhealthy levels.

ECB chief Draghi has been promising for two years to do everything he can to save the euro. He continues to announce unconventional measures. Every option covered by the mandate of the central bank has been tested - as well as those that aren't covered by it. With its monetary policy, the ECB has, alas, used up all its options.

The only options left, as it were, are no longer sound. The purchase of worthless bonds, also called junk bonds, is a continual break from taboo, just like the devaluation of the euro in previous weeks through Draghi's intervention.

DW's Henrik Böhme
Henrik Böhme says the ECB is skating on thin ice with its latest policy measuresImage: DW

It does not at all seem illogical to drain banks of bad credit so that they can hand out fresh credit to flailing companies. What is problematic though is that these banks have bundled this old credit burden in asset-backed securities.

This set-up was one of the triggers of the financial crisis, as the risks were no longer visible when they were constantly covered in new packaging. People no longer knew what the real risks were.

It is now surely not wrong to assume that banks that will sell those toxic assets hope to clear their balance sheets. Whether or not they'll go ahead to grant fresh credit to others is another story. The latest action of the ECB, selling banks cheap credit in the hope that they will inject it into businesses, has so far shown little effect.

However, one thing is clear: once the ECB takes the risks of financial institutions under its wings, it will become the bad bank of Europe. Not the private financial institutions will be liable, if something goes wrong, but Europe's taxpayers. But had there not been agreement after the financial crisis that the taxpayers should never again suffer from the financial tricks of bankers?