Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

If it had wished to maximize pressure on Europe’s government to preserve fiscal discipline, the ECB could have adopted a discriminatory system of nationally specific repo haircuts, imposing tougher conditions on less credible peripheral eurozone borrowers. Haircuts in the bilateral repo market in the United States varied widely across different types of bonds. A higher haircut would require banks to hold more capital against their bond holdings and shrink their portfolios of that debt. In Europe in the late 1990s, Greece had had to offer far higher interest rates to attract lenders than had Germany. But instead of discriminating, the ECB took the view that a single currency implied a single rate. It would repo the bonds of all European sovereigns on the same terms.29 Unsurprisingly, this produced a dramatic convergence of yields as investors bid up the price of higher-yielding debts from countries like Greece, Italy, Portugal and Spain, which in the eyes of the ECB were now equivalent to Bunds, Germany’s rock-solid