Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Faced with the financial pressures exercised by Germany, France had actively promoted the market for its own debt by offering American-style repo facilities.27 The easier it was to trade French debt for instant liquidity, the more actively it would be purchased and the more accepting the market would be of France’s borrowing requirements. Over the resistance of the Bundesbank, repo was adopted as a core operational model by the ECB. Unlike the more traditional central banks, like the Bank of England or the Fed, the ECB did not hold large quantities of government debt. It managed Europe’s financial system by repoing a wide range of bonds including both private debt and public bonds.28 Rather than the ECB, it was Europe’s banks that bought their governments’ debt. But they did so with the understanding that if they needed cash in a hurry, the bonds could be exchanged with the ECB on a repurchase basis. The terms of the repo and the size of the ECB haircut were the basic regulating variables in the unified financial system of the eurozone. In this respect, market logic was internal to the operation of the ECB to a degree that was not the case at either the Fed or the Bank of England.