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Liquidity in times of crisis: even the ESM needs it. CEPS Policy Brief No. 265, March 2012

Gros, Daniel. and Mayer, Thomas (2012) Liquidity in times of crisis: even the ESM needs it. CEPS Policy Brief No. 265, March 2012. [Policy Paper]

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    Abstract

    This paper argues that the new permanent European rescue fund, the European Stability Mechanism (ESM), should be provided with a liquidity backstop by having it registered as a bank – and be treated as such by the European Central Bank. If the crisis were to become acute again, the ESM would stand ready to intervene in secondary markets, potentially with almost unlimited amounts of funding. Access to central bank financing will be crucial in a future crisis, because in such a crisis risk aversion is likely to be extreme, and even the ESM might not be able to raise at very short notice the huge sums that might be required to prevent a breakdown of the financial system. Hundreds of billions of euro might be needed just to top up the programmes for Greece, Ireland and Portugal – and Spain and Italy may require more than a thousand billion euro. Sums of this order of magnitude cannot be raised quickly by a new institution. Simply increasing the headline size of the ESM might thus be of little use. The ‘ESM-bank’ (effectively a European Monetary Fund) would be subject to the same rules that apply to all other banks and the ECB would accept only high-quality collateral from it. The ECB could abandon its programme of purchasing peripheral government bonds and it would retain the final say on whether to provide liquidity to the ESM. Thus, the ECB would remain in control of central bank money supply and its role would be restricted to the classic functions of ensuring price stability and acting as a lender of last resort for banks. The management of external and internal imbalances within the euro area would be left to the ESM under the supervision of the finance ministers.

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    Item Type: Policy Paper
    Subjects for non-EU documents: Countries > Greece
    Countries > Ireland
    Countries > Italy
    Countries > Portugal
    Countries > Spain
    EU policies and themes > Policies & related activities > economic and financial affairs > EMU/EMS/euro
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on and consequences/reforms
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Policy Briefs
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 03 Apr 2012 15:01
    Number of Pages: 12
    Last Modified: 24 Apr 2012 13:01
    URI: http://aei.pitt.edu/id/eprint/34448

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