Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

If the ECB was a central bank, like the Fed or the Bank of England, there was no need for there to be a sovereign debt crisis at all. Greece had not borrowed in dollars. It had borrowed in euros and had delegated the sovereign power to print its own currency to the ECB. Its fate and that of the entire rest of the eurozone was in Trichet’s hands. All the ECB had to do to stop the destabilizing surge in Greek interest rates was to do what central banks do all over the world: buy sovereign bonds. Of course, bond buying was no long-term solution. Greece needed restructuring, fiscal discipline and economic growth. But at stake was the financial stability of a vast economic area. The Greek public debt was a tiny part of Europe’s financial system. The treaties that founded the ECB limited its right to buy newly issued Greek debt. But it could buy outstanding bonds as part of a market stabilization effort. If the ECB did not intervene it was a matter not of economics but of politics and over the winter of 2009–2010 it seemed that Europe’s central bankers were determined to take a tough line. Rather than continuing the generous liquidity provision it had offered in 2009, the ECB allowed the LTRO scheme to expire.30 Then in April 2010 it began to discuss a new regime under which it would apply graduated repo haircuts to lower-rated sovereign bonds, limiting their attractiveness to banks.31 Trichet was engaged in the high-risk gamble of substituting pressure in the bond markets for t...