King: 'We're too reliant on central banks'

Bank of England governor Mervyn King suggests dependence on central banks shows the downturn's intensifying. Don't mention the Sarko trade, then...

by Emma Haslett
Last Updated: 06 Nov 2012
As you tuck into your turkey this Christmas, take a moment to consider the plight of pinstriped eurocrats, locked in their offices, staring dejectedly out of the window until they come up with a way to get banks lending and people spending – and generally save Europe. Bank of England governor Mervyn King probably didn’t help their cause yesterday, when he said that the debt crisis is causing a worrying dependence on central banks. King said the crisis had been deepened by what he calls ‘negative interlinkages’ (the way that cross-holdings between banks can mean a problem with one is a problem with all), and that Governments’ dependence on the BoE, the European Central Bank, etc, are a sign that ‘stressed financial conditions are passing through to the real economy’.

King made the comments after a meeting of the European System Risk Board, and just over a day after the ‘Sarko trade’ (so-called because the French president is a big supporter), whereby the European Central Bank lent €489bn (£407bn) to 253 European banks in an effort to increase liquidity. The idea is that when Governments run into trouble, they can borrow from their own banks, rather than turning to central banks for help.

But economists have expressed concerns that while that’s a good short-term solution, making banks lend to Governments that may or may not be able to pay their debts puts them in a much riskier position in the long-term. Markets, though, seemed satisfied, with the French CAC, the German DAX and the FTSE all rising by between 1% and 1.36% (although to be fair, it’s generally accepted that the markets are more fickle than Simon Cowell at a school talent show, so they’re not necessarily reliable).

Still: there are signs that the ECB may have more than one trick up its sleeve, after soon-to-be ex-ECB executive board member Lorenzo Bini Smaghi suggested Quantitative Easing might be the bank’s chosen course of action if deflation threatens to become a problem. Bini Smaghi, who’s due to step down from his position at the end of the year, told the FT that ‘if conditions changed… I would see no reason why such an instrument, tailor-made for the specific characteristics of the euro area, should not be used.’

So far, the ECB’s head honchos have done everything in their power to avoid even the suggestion that QE might be an option. As its president, Mario Draghi, said earlier this week, ‘we won’t achieve [trust in Europe] by destroying the credibility of the ECB’. Bini Smaghi, though, was more to the point about it: ‘I do not understand the quasi-religious discussions about quantitative easing,’ he said. But he also coyly suggested that if it did take place, the ECB would expect Britain to pull its weight. ‘The European Union and ECB would certainly contribute to help Britain if London was in difficulties. I would thus expect a reciprocal attitude.’ Hmm. We’ll see what David Cameron has to say about that…

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