آیا اقدام بانک مرکزی اروپا به عنوان یک وام دهنده از آخرین راهکار وام های بدون پشتوانه در طول بحران است ؟: شواهد حاصل از مدل واکنش سیاست پولی

We investigate whether the ECB aligns its monetary policy with financial crisis risk in EMU member countries. We find that since the outbreak of the subprime crisis the ECB has significantly increased net lending and reduced interest rates when banking and sovereign debt crisis risk in vulnerable EMU countries (Greece, Ireland, Italy, Portugal, and Spain) increases, while no significant effect is identified for the pre-crisis period and relatively tranquil EMU countries (Austria, Belgium, France, Germany, and the Netherlands). These findings suggest that the ECB acts as a Lender of Last Resort for vulnerable EMU countries.

The financial turmoil produced by the subprime lending crisis has been the most difficult challenge for the Economic and Monetary Union (EMU) since its inception twelve years ago (Trichet, 2010). The subprime lending crisis, triggered by significant reductions in leverage and prices in the U.S. housing market and intensified by global macroeconomic imbalances, insufficient banking regulation, and fast credit expansion driven by lax monetary policy, has brought many banks in the EMU to the verge of bankruptcy.2 Recessions and national bank bailout plans amounting to hundreds of billions of euros feed speculations about possible sovereign debt defaults in the most vulnerable EMU member countries – Greece, Ireland, Italy, Portugal, and Spain. Several fiscal and monetary policy instruments can be used to address the problems of the banking and government finance sectors. Fiscal policy instruments include, for example, national bank bailout plans, supra-national bailout plans for governments or sovereign debt restructuring schemes. National bank bailout plans have been implemented in most EMU countries during the crisis and EU/IMF bailout plans for Greece, Ireland and Portugal rescued these countries from insolvency. For some overindebted EMU countries such as Greece, sovereign debt restructuring schemes are discussed, which may include haircuts or a lengthening of the maturity. Such orderly sovereign debt defaults may be a viable long-run solution for the debt problem. However, till now such restructuring schemes have no majority among European policymakers. Monetary policy measures of the European Central Bank (ECB) are used instead to address problems in the EMU banking and government finance sectors in the short run.3 We focus on the monetary policy instruments the central bank can use to address the financial problems in the EMU. A major cause of the subprime crisis is the significant reduction in leverage (due to higher collateral requirements) and the associated fire-sales of assets that lead to capital losses (Geanakoplos, 2009 and Geanakoplos, 2010). By increasing the liquidity supply to banks the central bank may reduce the pace of deleveraging and the number of bank failures. The central bank can also purchase sovereign bonds in order to support sovereign bond prices (or, equivalently, reduce redemption yields on sovereign bonds) and help governments issuing sovereign bonds. Or the central bank can reduce interest rates in order to reduce the refinancing costs of banks and governments.4 The question is whether the ECB implements these rescue measures for all EMU countries or whether countries leave the EMU and use a national monetary policy to implement suitable measures. Thus, given the financial vulnerabilities in the EMU the ECB basically has two alternatives. It can act as a Lender of Last Resort and bailout the banking sectors and governments of vulnerable member countries using monetary policy. Or, it can leave monetary policy unchanged (or does not adequately address the financial problems) at the risk that vulnerable member countries may leave the EMU to let national central banks do the job as a Lender of Last Resort. Since the European Central Bank (ECB) implements a monetary policy for all members of the currency union, it cannot serve to stabilize all nations in the union at all times. Consequently, national monetary policy is not available as an instrument to buffer macroeconomic shocks.5 While the benefits of being a member of the EMU (such as lower transaction costs and the absence of currency risk within the EMU) can be assumed to be relatively stable over time, the costs are time-varying. Especially in the vulnerable countries (Greece, Ireland, Italy, Portugal, and Spain) the costs of EMU membership have drastically increased during the crisis since national monetary policy cannot be used to cope with banking and sovereign debt problems. Entering the EMU was so far considered as being irreversible. By substituting the national currency for euros at an “irrevocably fixed rate”,6 member countries loose their sovereignty over national monetary policy and had hitherto no legal means to reassert it. Many authors argue, however, that sovereign states can choose to withdraw from the EMU ( Cohen, 1993, Scott, 1998, Buiter, 1999 and Eichengreen, 2007). Polling data of the Eurobarometer suggests that a withdrawal from the EMU would be democratically legitimated in several vulnerable member countries. More than 50 percent of the March 2009 polling respondents in Italy, Portugal, and Spain, for example, believed that using national monetary policy would be more effective in resolving the consequences of the subprime lending crisis than the monetary policy conducted by the ECB ( Jones, 2009). The new Treaty of Lisbon includes a new provision that allows member countries to “withdraw from the Union”.7 This new provision provides for automatic withdrawal if a withdrawal agreement between the withdrawing member and the other members fails: the “Treaties shall cease to apply to the State in question” two years after the Council is notified of the state’s intention to withdraw and unless that period is extended.8 This new provision makes it clear that membership in the EMU is not irreversible but rather an ongoing freely-made choice. Having the right to withdraw from the EMU may cause the members to re-think the pros and cons of remaining in the eurozone. As the crisis of the European Monetary System in 1992 illustrates, opportunistic governments may rationally decide to reassert national authority over monetary policy if the benefits of dropping out exceed the benefits of remaining in a fixed-rate regime ( Obstfeld, 1994 and Obstfeld, 1996). In order to guarantee the integrity of the EMU, the ECB may act as a Lender of Last Resort and implement monetary policies that fit, in particular, the needs of the vulnerable member countries.9 Thus, monetary easing of the ECB may be partly interpreted as a countermeasure against the risk of a possible break-up of the EMU. We expect that the ECB will implement a more expansionary monetary policy (i.e. increase net lending and reduce interest rates) when banking and sovereign debt crisis risk in the vulnerable EMU member countries grow. In order to test whether the ECB takes financial crisis risk into account when implementing its monetary policy, we estimate monetary policy reaction models, where net lending or the interest rate set by the ECB is modeled as a function of financial vulnerabilities which are indirect measures of the incentives to leave the EMU. We use monthly data from January 1999 to December 2010. This observation period includes a relatively tranquil period of January 1999 to July 2007, prior to the outbreak of the subprime crisis, as well as the crisis period of August 2007 to December 2010. In order to test whether the ECB has responded to the financial vulnerabilities only since the outbreak of the subprime lending crisis, we estimate our models for these two subsamples separately. We find that since the outbreak of the subprime lending crisis (August 2007) the ECB has significantly increased net lending and reduced interest rates when banking and sovereign debt crisis risk in the five vulnerable EMU member countries increase. We do not find evidence that the ECB responded to crisis risk in the pre-crisis period and in the five relatively tranquil EMU countries (Austria, Belgium, France, Germany, and the Netherlands). These findings indicate that, in order to prevent withdrawals of the most vulnerable member countries from the EMU, the ECB systematically increases liquidity supply and reduces the funding costs for banks and governments when the risk of banking or sovereign debt crisis increases. Thus, since the outbreak of the subprime lending crisis, the ECB may have become the Lender of Last Resort for the most vulnerable EMU member countries. The rest of the paper is organized as follows. Section 2 discusses the changes in the ECB’s monetary policy since the outbreak of the subprime crisis. Section 3 analyzes the benefits and costs of the Lender of Last Resort policies of the ECB. Section 4 presents our hypotheses, outlines the empirical model, describes the data and presents the results. Section 5 concludes.

We have shown that since the outbreak of the subprime lending crisis the ECB has taken banking and sovereign debt crisis risk into account when conducting its monetary policy. We have found that since the outbreak of the subprime crisis the ECB has significantly increased net lending and reduced interest rates when banking and sovereign debt crisis risk increased in the five vulnerable EMU member countries – Greece, Ireland, Italy, Portugal, and Spain. No significant effect is found for the pre-crisis period. We also do not find evidence that crisis risk in the five relatively tranquil member countries – Austria, Belgium, France, Germany, and the Netherlands – plays a significant role in determining the ECB’s monetary policy. This result is in line with our hypothesis that in order to prevent withdrawals of the most vulnerable member countries from the EMU, the ECB systematically increases net lending and reduces the interest rate when banking and sovereign debt crisis risk in the vulnerable EMU countries increase. By increasing the liquidity supply to banks, supporting the prices (and, indirectly, issuance) of government bonds, and reducing funding costs the ECB may have become the Lender of Last Resort for the banking systems and governments of these vulnerable EMU members. Of course, our results leave some room for interpretation. In our line of argument the ECB adjusts monetary policy with increased crisis risk in order to keep countries from leaving the EMU. Nevertheless, other motives like general economic stabilization might matter but seem less likely from our point of view. However, to properly distinguish between different motives it would take a testable political model. The consensus among the EMU member states regarding the implementation of the ECB’s anti-crisis measures seems to have shrunk during the different stages of the ECB’s role as a Lender of Last Resort. After the outbreak of the subprime crisis the ECB had little alternative than to act as a Lender of Last Resort. Anecdotic evidence suggests that the ECB’s Governing Council made the notorious unanimous decisions on the implementation of monetary expansion, non-standard measures and interest rate cuts from 2007 to 2009. The implemented measures helped to contain the banking and sovereign debt crises in the EMU and, as yet, no member country has decided to leave the eurozone. However, since 2010 negative consequences of the ECB’s anti-crisis policies are to be observed. The monetary easing now leads to inflation rates above the ECB’s goal of below but close to 2%. Driven by the low interest rates banks may increase their risk-taking setting the stage for future financial crises.29 The rescue measures of the “Securities Markets Programme” are relatively controversial as the ECB’s holdings of risky sovereign bonds may lead to less political and financial independence of the ECB. The decision to implement the “Securities Markets Programme” has revealed the conflicts of interest within the ECB’s Governing Council. In an interview with Le Monde, ECB President Trichet mentioned that the May 9, 2010 decision in the ECB Governing Council regarding the implementation of the “Securities Markets Programme” was made with “an overwhelming majority” as opposed to the usual “unanimous decision”. Later on, on February 11, 2011 Axel Weber, President of Deutsche Bundesbank, resigned stating that he was no longer willing to support the anti-crisis policies of the ECB. Time will show how long the ECB will continue with monetary easing and the implementation of “non-standard” measures given the internal disagreements within the ECB’s Governing Council.