Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

In the eurozone things were more complicated. There too the automatic stabilizers kicked in and deficits ballooned. Debt issuance surged. But unlike in the UK or the United States, the ECB is barred from buying newly issued government securities. After Lehman, however, Trichet was in no mood to take risks. Though the ECB did not purchase newly issued government debt, what it did do was to repo sovereign euro bonds.27 As the eurozone deficits ballooned, the ECB operated what was known informally as the “grand bargain.”28 It supplied hundreds of billions of euros in cheap liquidity to Europe’s banks in the form of the so-called Long-Term Refinancing Operation initiated in May 2009.29 The banks then bought sovereign bonds. On average, the rate Europe’s banks paid to the ECB on the CTRO funding was only a third of the yield they earned on their bond holdings. All told, in the eurozone in 2009 the banks loaded up on 400 billion euros’ worth of sovereign debt.30 It was easy and apparently safe profit, and it was Europe’s most stressed banks, including Germany’s bankrupt Hypo Real Estate and Franco-Belgian Dexia, that were keenest to take advantage. Seeking to maximize their return, they put the ECB’s funds into the riskier peripheral bonds from Portugal and Greece that were offering a marginally higher yield. As in the UK and the United States, this helped to stabilize the government debt market, but there was a crucial difference. In the United States and the UK the central ban...

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