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Glass-Steagall Would Prevent Downgrading of Eurozone Debt

On Friday the 13th of January, Standard & Poors downgraded nine European countries, including previously triple A France and Austria. That led automatically to a reduction in the size the European Financial Stability Facility, the euro bailout fund, which was downgraded on the 16th.

Different EU governments and bureaucrats have struck out at the rating agencies, accusing them of wanting to "destabilize" the Eurozone. Some have threatened political and legal actions. While the fact that a few private agencies decide globally on the level of risk in investing in sovereign debt is an outrageous proposition in itself, the protests will remain impotent as long as the solutions are sought within the system.

The current situation, where private rating agencies dominate the financial markets, is the result of the abolition of the Glass-Steagall standard for bank separation. Since then, banks have "outsourced" risk assessment to rating agencies, which is considered indispensable in order to play the global gambling game. Replacing private rating agencies with official institutions does not change the problem. Risk assessment has to be brought back where it belongs, i.e. to those individual investors (banks) which buy sovereign debt. This means re-establishing nationally regulated systems.

In any case, with or without rating agencies, the Eurozone monetary and financial system has entered a hopeless downward spiral. The so-called sovereign debt crisis was provoked by the bank bailouts in the first place. The banks then took that money from the governments and the ECB, and used it to speculate against the governments, who turned around and bailed out them out again!

With its Christmas present of 500 billion euros to the banks, through the new three-year tender, the ECB has made the shortcut even shorter. The carry trade idea that banks would use the money to buy sovereign bonds (named "Sarko trade" after its inventor Nicolas Sarkozy), was praised by Mario Draghi at the Jan. 12 ECB monthly press conference, because banks indeed used part of that money to buy sovereign bond emissions of Italy and Spain, thus reducing their yields. However, this involved only three and one year bonds – the maturity covered by ECB loans.

Even the New York Times has realized that the disintegration of the Eurozone is inevitable due to the mix of monetary policy and austerity measures. "Germany should realize by now that without growth its beleaguered neighbors will never be able to pay back their debts," wrote the NYT in a leading editorial Jan. 14. "Europe's problems have spiraled so far out of control that no one knows what policy mix will work. What is certain is that a single-minded obsession with austerity will only deepen the crisis."

Realizing that austerity is killing Europe is important, but more important is to realize that the solution is not money-printing, Eurobonds or similar supranational flight forwards. The solution is: Glass-Steagall to dump the gambling debt and national credit policies for investments.

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