The Beautiful Circle

The European Central Bank (ECB) is printing a lot of money to bail out struggling governments and banks. Here is a graph of its balance sheet to illustrate exactly what I mean by printing a lot of money money:

ECB balance sheet, millions €

Source: ECB

One of the problems with this (beside the fact that it's creating inflation on steroids, of course) is that by doing this it is exposing itself to a lot of risk which comes with lending to nearly bankrupt governments and banks. If these assets are written down the ECB will face losses that cold likely lead to negative capital. In this case the Eurozone member states have to recapitalize teh ECB. Get it?

If the Eurozone governments become insolvent and can't pay their debts, causing financial institutions lending to these governments to also become insolvent, leading the ECB to reach negative capital, these same bankrupt governments must somehow raise money and recapitalize the ECB. I wonder who's gonna get the bill.

But all in all, a beautiful circle, no?



Matej Avsenak Ogorevc