The New Soros Plan on How to Save Italy and Spain

LvMIC:


Much like his last plan, Mr. Oligarch Insider once again makes another plea for the European Central Bank to intervene on behalf of the governments of Spain and Italy.  Writing in the Financial Times, Soros stays infatuated with infinite liquidity provided by the printing press:

My proposal is to use the European Financial Stability Facility and the European Stability Mechanism to insure the ECB against the solvency risk on any newly issued Italian or Spanish treasury bills they may buy from commercial banks. This would allow the European Banking Authority to treat the T-bills as the equivalent of cash, since they could be sold to the ECB at any time. Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB. Italy and Spain would then be able to refinance their debt at close to the deposit rate of the ECB, which is currently 1 per cent on mandatory reserves and 25 basis points on excess reserve accounts. This would greatly improve the sustainability of their debt. Italy, for instance, would see its average cost of borrowing decline rather than increase from the current 4.3 per cent. Confidence would gradually return, yields on outstanding bonds would decline, banks would no longer be penalised for owning Italian government bonds and Italy would regain market access at more reasonable interest rates.

Soros’ scheme amounts to nothing more than backdoor monetization at a more aggressive rate than is happening currently with the ECB’s  LTRO program.  Take one look at the rise in the ECB balance sheet since the program kicked into gear (ht Zerohedge)

The resulting backdoor quanto easing in Eurozone is clear from the recent surge in the ECB’s balance sheet relative to the Fed’s. Thus, the ECB’s total assets have risen by 38% from €1.94tn on 1 July 2011 to €2.69tn on 6 January 2012. While the Fed’s total assets have risen by only 1% from US$2.87tn to US$2.9tn since July 2011.

And Soros wants more of this?  Just think about it, in order for Spain and Italy to refinance their debt “at close to 1%,” the ECB must be willing to buy treasuries from Eurozone banks.  These banks must be guaranteed virtually risk-less profit to play along, hence keeping the rate above the .25% currently paid for excess reserves at the ECB (which took a page from Bernanke’s play book).  With the ECB ready and willing to eat up more government bonds, suppressing yields shouldn’t be a problem outside a hyperinflationary event.  With fresh funds flowing from the banks, which have pretty much become wards of the state at this point, debt will be effectively monetized to the happy benefit of bailout out member state governments and banks looking to dump toxic securities.  As Martin Sibileau points out, this process can be aided in part with the Federal Reserve’s recent advent of cheapening dollar swap lines.

The new Soros plan is the same kind of bailout, money printing extravaganza that central bankers, politicians, and their friends love to resort to in times of fiscal trouble.  Not only does it direct further capital away from capital constrained banks into bloated and unproductive bureaucracies, it would further perpetuate the belief that mistakes bear no consequences in the world of central banking.  Soros wants economic growth in the Eurozone but also wants the resources to fund such increases in productive capacity to instead be directed toward governments.  If the authorities just have enough “sufficient resources” to deal with their overspending, then all will be well.  Never mind that their profligate spending, overregulation, and inability to recognize the boom-bust cycle engineered by central banks lead to this crisis.  The plan is essentially one long punt to give these so-called leaders a chance to come up with further band aids to save their own jobs.
Soros wants an end to the “deflationary vicious circle” but, like any good Keynesian, doesn’t have the courage to admit such deflation is only in response to previous inflationary practices.  He surprisingly concedes his true intention at the close:

The stimulus must come from the EU because individual countries will be under strict fiscal discipline. It will have to be guaranteed jointly and severally – and that means eurobonds in one guise or another.

And with that Soros admits his desire for fiscal integration; the very next step toward centralizing statist power.  Elitist puppeteering has a name, and it's George Soros.