There is a fascinating article from Bronte Captial about the Euro Fix.
The story so far, if you’ve forgotten: the ECB can’t be a lender-of-last-resort to governments, because it isn’t allowed to (from memory, the Krauts say No). But in a transparent fix, it is allowed to lend to banks, if those banks put up suitable collateral. And it has said, lo, government debt, that is good collateral. And so 500 bn has been loaned.
Why, as a bank, would you want to buy shonky govt debt? Because dodgy Italian debt yields 6% or so at the moment, and lord knows what the Greek stuff provides. But the ECB loans are at 1%. With the difference yielding 5% pure profit risk-free (ahem), hooray. The downside, of course, is the long-term capital risk.
The Bronte article is speculating on the likely conflicts between the banks’ traders – who can presumably see the short-time huge bonuses coming out of the short-term profits, all sanctioned by the Euro-governments desperation to get the banks to buy the debt – against the Risk Dept., who probably don’t want to touch it with a bargepole.