The Central Bank Dilemma: So Much Money, So Little Leverage

By acting more like its American counterpart, the European Central Bank (ECB) can help calm the continent’s shaky markets. But don’t expect it to “solve” the crisis – at least not without cooperation from Europe’s stingy commercial banks.

The Europen Central Bank (ECB) in Germany
The Europen Central Bank (ECB) in Germany
Hans von der Hagen

MUNICH -- The weakest link in a chain, or so the saying goes, is the strongest. In the present crisis, the weakest link is the banking sector. Indeed, all discussions about how to solve the reigning chaos end with the question: What about the banks? If Greece goes belly up, or the euro crashes: What about the banks?

But the real question, which is what the banks could do to help solve the crisis, isn't even being asked anymore. Maybe that's because it has become apparent that banks in their present structure are quite simply not equipped to deal with major faults in the financial markets.

Credit worthiness, their most important capital, turns out to be pretty volatile in difficult situations. Right now, U.S. banks are hesitant about lending dollars to their Old World colleagues. But it's not only transatlantic business that is suffering: interbank lending in general has pretty much dried up – just the way it did after the Lehman bankruptcy.

What that means is that right now, when banks want to borrow, they don't turn as they normally would to other banks, but often go directly to central banks, which are presently financing commercial banks like never before.

Currency Euphoria

The European Central Bank (ECB), for example, is currently offering not just euros but dollars, which it has to borrow from the U.S. Federal Reserve. In this past Wednesday's concerted action, the Fed lowered the interest rate that the ECB has to pay for the dollar, which means that European commercial banks can get cheap dollars at the ECB.

The move came as a surprise, and eased the money market – which is why the exchanges reacted with a burst of currency fireworks. But by Thursday the euphoria was gone. Because if one thing is manifestly clear, it is that such measures help in the short-term but offer no permanent solution to the banking sector's problems. On the contrary: the move shows just how serious the crisis, now in its fourth year, really is.

But these days, politicians expect a lot more from central banks. They are not only supposed to ensure calm, and make sure the banking sector is functioning properly, they're supposed to help get a handle on the crisis as a whole.

In the United States, the Fed does that voluntarily – it sees its duties as not only keeping prices stable but looking out for healthy economic growth. And it goes very far to ensure that. It buys government bonds by the billions, which is to say, it prints money. It has already announced that it would keep interest rates low into 2013.

"Unusual measures'

In Europe, the ECB is having a tougher time dealing with what it calls "unusual measures." While it can work to ensure that prices remain stable, it cannot work to foster healthy growth, much less rescue states. But it is now expected to become more American, to do what the Fed does, including act as lender of last resort.

All of the ECB's attempts to resist these demands have failed. The pile of debt in Greece and other countries is going to cost more, and sooner, than anyone thought. Somebody has to pay, and that somebody is the ECB.

But even if, theoretically at least, the bank had an infinite amount of money -- that's not going to solve the crisis. Charles Plosser, who sits on the Fed's Open Market Committee, admits it is frustrating that monetary easing has so far achieved so little. "It's possible we don't have the right instruments to heal the disease the system is suffering from," he said in an interview with Handelsblatt. "We not only have to understand what monetary policy can do, but what it can't do. When a doctor makes a wrong diagnosis, he can make the patient's condition worse."

The European Central Bank (ECB) can calm markets too, but not solve the problems – especially not by buying junk bonds. On the contrary, by flooding the market with money today, the ECB is creating tomorrow's inflation. With low interest rates and bond buys, it's making significant amounts of money available to commercial banks, which have not been lending. Instead they've been busy hoarding. The businesses that the money is supposed to serve barely see any of it.

That's the dilemma in this crisis. The central banks would need the help of the commercial banks to get all that cheap money being hoarded into circulation. Instead, it's the other way around. The central banks are helping the commerical banks. So the chain doesn't break.

Read the original story in German

Photo - MPD01605

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In Argentina, A Visit To World's Highest Solar Energy Park

With loans and solar panels from China, the massive solar park has been opened a year and is already powering the surrounding areas. Now the Chinese supplier is pushing for an expansion.

960,000 solar panels have been installed at the Cauchari park

Silvia Naishtat

CAUCHARI — Driving across the border with Chile into the northwest Argentine department of Susques, you may spot what looks like a black mass in the distance. Arriving at a 4,000-meter altitude in the municipality of Cauchari, what comes into view instead is an assembly of 960,000 solar panels. It is the world's highest photovoltaic (PV) park, which is also the second biggest solar energy facility in Latin America, after Mexico's Aguascalientes plant.

Spread over 800 hectares in an arid landscape, the Cauchari park has been operating for a year, and has so far turned sunshine into 315 megawatts of electricity, enough to power the local provincial capital of Jujuy through the national grid.

It has also generated some $50 million for the province, which Governor Gerardo Morales has allocated to building 239 schools.

Abundant sunshine, low temperatures

The physicist Martín Albornoz says Cauchari, which means "link to the sun," is exposed to the best solar radiation anywhere. The area has 260 days of sunshine, with no smog and relatively low temperatures, which helps keep the panels in optimal conditions.

Its construction began with a loan of more than $331 million from China's Eximbank, which allowed the purchase of panels made in Shanghai. They arrived in Buenos Aires in 2,500 containers and were later trucked a considerable distance to the site in Cauchari . This was a titanic project that required 1,200 builders and 10-ton cranes, but will save some 780,000 tons of CO2 emissions a year.

It is now run by 60 technicians. Its panels, with a 25-year guarantee, follow the sun's path and are cleaned twice a year. The plant is expected to have a service life of 40 years. Its choice of location was based on power lines traced in the 1990s to export power to Chile, now fed by the park.

Chinese engineers working in an office at the Cauchari park


Chinese want to expand

The plant belongs to the public-sector firm Jemse (Jujuy Energía y Minería), created in 2011 by the province's then governor Eduardo Fellner. Jemse's president, Felipe Albornoz, says that once Chinese credits are repaid in 20 years, Cauchari will earn the province $600 million.

The Argentine Energy ministry must now decide on the park's proposed expansion. The Chinese would pay in $200 million, which will help install 400,000 additional panels and generate enough power for the entire province of Jujuy.

The park's CEO, Guillermo Hoerth, observes that state policies are key to turning Jujuy into a green province. "We must change the production model. The world is rapidly cutting fossil fuel emissions. This is a great opportunity," Hoerth says.

The province's energy chief, Mario Pizarro, says in turn that Susques and three other provincial districts are already self-sufficient with clean energy, and three other districts would soon follow.

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