Unlimited liquidity provision, buying peripheral bonds: the ECB is pretty much the only European institution to have taken any sort of meaningful action since the sovereign debt crisis began.
So it will be interesting to see what it can do with this: “The ECB and national central banks may act as fiscal agents for the entities referred to in article 21.1 [central governments and other public authorities].”
The text is from an article in the ECB's founding treaty, and it is doubtless supposed to refer to the narrow financial meaning of the term "fiscal agent" — basically acting as trustee or paying agent. But in the same spirit as EuroWeek's suggestion at the start of July of massive buying of Greek government debt by the central bank — a proposal that subsequently became the topic of mainstream debate — it's time for another thought experiment. What if the central bank could interpret the article as a mandate to collect taxes?
Any structured finance investor knows that the role of an asset servicer is vitally important. Notes in the Monastery RMBS series, backed by bulletproof Dutch mortgages, have been downgraded for this very reason. Poorly rated servicers mean deals get downgraded — because rating agencies have woken up to the risks of servicer insolvency.
Isn’t it the same for sovereign debt? Some governments that are supposed to be collecting the income streams that secure their debt are themselves far from stable and teetering near to insolvency.
Suppose the ECB was given the mandate to collect Greek or Irish taxes. It could dutifully segregate the cash raised in a separate account, which would be used to pay interest on the sovereign debt of the country in question and redeem bonds when they came due.
Anything left over would get passed on to the sovereign, which could do any damn thing it liked with it. No more discussion about fiscal union or whether governments had the credibility to force through a programme of austerity. They would get the money once bondholders had got theirs. Simple.
Of course there are a couple of problems with this idea. First, the small matter of coming to terms with what would no doubt be seen as a fairly severe loss of sovereignty. Second, peripheral governments need to borrow more than they are collecting in taxes in the short term. Otherwise we wouldn’t be having this discussion. But it's a safe bet that new bond issues with the ECB written in as tax collector/asset servicer would come a lot cheaper than issues without.
The other problem is more pragmatic: the ECB knows nothing at all about collecting taxes. But tax expertise can be hired. Inserting the ECB at the vital interface, before tax receipts reach government coffers, draws on the ECB’s reputation and credibility without swelling its balance sheet too much or creating monstrous unfunded liabilities.
And it’s in the ECB’s interest — after all, it holds most of this stuff. The plan needs more detail, but until German chancellor Angela Merkel pulls something truly momentous out of the bag, armchair eurozone solutions are as good as anything policymakers are doing.