Week after week, market watchers hang on the German chancellor's every pronouncement about the euro-zone's debt travails, so one might be forgiven for thinking that Germany has been propping up the whole troubled enterprise. In fact, the European Central Bank has for the past 15 months been manning the front line. That's been politically expedient, but it's also an even bigger threat to the survival of the euro than is the restructuring of euro-zone bank and sovereign debt that the ECB has been so determined to avoid.
Europe has been playing a destructive game of pass-the-dodgy-debt for two years now. Much of this debt ultimately winds up at the ECB, though the schemes that get it there are often so disgracefully disguised that they would attract high-profile government crackdowns were they to occur in the private sector. The Irish National Asset Management Agency, for example, buys bad bank debt with newly conjured government IOUs, which the banks then pass on to the ECB for cash, making it look like a run-of-the-mill central bank liquidity operation.
With attention on the €116 billion in sovereign bonds the ECB has gobbled up since May 2010 (a third of which it acquired in the past three weeks), little notice has been paid to the €525 billion that the ECB has lent to banks, often against highly suspect collateral.