EconoMonitor

The Kapali Carsi

Sarkozy’s bright idea

Below is the weekly guest column by Taylan Bilgic, which was published last Friday at Hurriyet Daily News. My comments are, as always, right below the column.

 

[The European Central Bank’s three-year lending operation (LTRO), a first in its history, was met with huge demand Dec. 21. A total of 523 European banks borrowed around 490 billion euros from this new facility that aims to inject liquidity into the system, restoring confidence in the crucial interbank market.

According to estimates from Marc Chandler, the chief currency strategist at Brown Brothers Harriman, the net effect of the operation will be a cash injection of about 210 billion euros into the eurozone financial system. A similar three-year auction will be held in February. Until then, lower reserve requirements by the ECB will free up another 100 billion euros for lenders.

What will European banks do with all this cash? In “normal times of crisis,” they would be expected to lend more to corporations and individuals, facilitating economic expansion which would also be crucial in balancing government budgets.

However, French President Nicolas Sarkozy has another idea. Shortly after the ECB announced the LTRO operation, Sarkozy said banks could use the facility to buy eurozone sovereign debt. According to this logic, banks that have borrowed these ECB funds at a cost of 1 percent could use them to purchase higher-yielding sovereign bonds, such as Italian and Spanish debt that nowadays are offering yields above 5 percent.

What Sarkozy suggests is a government-sponsored form of “carry trade” that brings back bad memories of the 1990s for Turkish citizens. Economist Uğur Gürses labeled this “brilliant solution” in his Dec. 19 Radikal column as the “Demirbank syndrome,” referring to the bankrupt lender that was the biggest “market maker” in Treasuries until the end of 2000. At that time, the lender, which was the “expert” in the kind of carry trade Sarkozy talks about, ranked among the top five banks of Turkey.

However, a sudden spike of interest rates in November 2000 caught Demirbank with a huge load of low-yielding government debt and it went bust, incurring billions of dollars of losses on the taxpayer. And Demirbank was just the biggest one among many lenders that enjoyed easy profits through this practice but then went bankrupt. Selim Somçağ’s “Turkey’s Economic Crisis” provides a lively account of those turbulent days.

Even if Turkey’s experience is ignored, European banks are unlikely to invest in peripheral government debt, as they have been reducing such exposure for the past two years now. Thus, the air of Christmas optimism in the eurozone markets may prove to be short-lived.

France’s National Assembly yesterday passed a bill that would make it illegal to deny that the 1915 mass murders of Armenians in Anatolia constituted genocide. I agree with many who point toward the two-faced attitude in Paris regarding the 2012 presidential elections and also France’s bloody colonial past which includes, among many others, crimes against humanity in Algeria. However, the Turkish government would be acting more sincerely if it first apologized to the Algerians. After all, staunch NATO ally Ankara always acted in support of French colonialism at the international arena. This support included a shameful “No” for a U.N. General Assembly decision that condemned French state terrorism against the Algerian people and an abstainment at a 1958 U.N. General Assembly vote on the self-determination right of the Algerian people.]

 

I will not comment on the genocide issue, as I sincerely think Turks and Armenians are equally moronic about it; the former for believing (although this is now changing) that at least several hundred thousand Armenians simply died during their relocation or worse vanished into thin air, and the latter for building their identity through hatred of the Turks. But neither is as idiotic as the French, who have in essence thrown 1/3 of their motto down the drain by making it a crime to deny the Armenian genocide. Just think the opposite: What would happen if Turkey had made it a crime to accept the genocide?

Anyway, coming to economics, as Felix Salmon agrees with Taylan that it is not likely Italian banks will end up buying Italian government bonds. This is in fact a good thing, as the Turkish example shows that those circular-bond-buying tales could end in tears. However, Gillian Tett argues that deepening ties between sovereigns and banks is nevertheless likely to be one of the key themes of 2012. As you’ll notice when you read them, the two columns are not really contradicting each other…

 

Sarkozy’s bright idea

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