How Gangsters are Saving the Eurozone
By Stephen Fidler
Gangsters, drug dealers and criminals engaged in money laundering appear to be helping to shore up the financial stability of the eurozone. That is thanks to the demand, European officials said, for high-denomination banknotes, mainly from 200 euros and 500 euros. The European Central Bank issues these bills for a large profit which is welcome at a time when their response to the financial crisis has cast doubt on their financial strength.
The high value notes are "the euro is becoming increasingly the favorite currency in the black economy and to all those who value the anonymity of their transactions and financial investments," wrote Willem Buiter, chief economist at Citigroup (Citigroup on the list of USA tax havens) in a recent report. The business of issuing euro banknotes, produced at a cost close to zero, is "extremely profitable" for the ECB, Buiter wrote. (And the U.S. has given billions?)
When euro banknotes and coins were brought into circulation in January 2002, the value of the existing 500 euro was 30,800 million euros, according to the ECB.
Today, there are approximately 285,000 million euro banknotes in circulation, yielding an annual growth rate of 32%. By value, 35% of euro banknotes in circulation are the largest denomination, the 500 euro note that few people get to see.
In 1998, Gary Gensler, then a member of the U.S. Treasury showed public concern about the competition to the $100 bill, the highest value in U.S. banknotes, posed by the largest euro and its possible use by criminals. He noted that $1 million in $100 bills weighs 22 pounds, in hypothetical $500 bills, would weigh just 4.4 pounds. (I do not see the problem to print 1,000 tickets, or $ 10,000)
Police have found large euro notes in cereal boxes, wheels and hidden compartments in trucks, said Soren Pedersen, a spokesman for Europol, the European police agency based in The Hague. "It goes without saying that this money is often linked to the illegal drug trade, which explains the similarity of the methods of concealment that are used."
An ECB spokesman declined to comment on who uses the euro notes.
The ECB and the governments that belong to it are the beneficiaries of the demand for large bills.
The profit a central bank obtains from issuing currency - as well as other privileges of a central bank, such as asking for free or low cost deposits from banks - is known as seigniorage. It normally accumulates in the national treasures after the central banks account for their own costs.
Proceeds from the ECB seigniorage emission are becoming increasingly important this year.
The ECB has included in its balance sheet hundreds of billions of euros of unknown quality in response to the global financial crisis.
It holds more than 600,000 billion in collateral for banks to whom it made loans, and over 400,000 billion in securities it holds directly, including government bonds.
In general, the ECB's balance sheet has grown to nearly 2 trillion euros (million million). It has a capital base of 78,000 billion euros. That is a leverage which makes it look like a "hedge fund on steroids," said Buiter. It wouldn't need to lose much with these assets to wipe out its thin cushion of capital.
That's where seigniorage comes in. Then it becomes important with the benefits obtained from the issuance of currency.
In recent years, the profits of its issuance of new paper currency was 50,000 billion euros. In 2008, the year of the crisis of Lehman Brothers, it was 80,000 billion euros.
Even with conservative assumptions about future growth of currency in circulation - of, say, 4% per annum, which is in line with the ECB's target inflation rate of 2% plus economic growth rate - Buiter estimates future seigniorage profits for the central bank will be between 2 trillion euros and 6.9 trillion euros.
Thanks to seigniorage, he says, the ECB is "super solvent." (Just like the Fed, except that this is more supersolvent it is the queen and the U.S. currency can be indebted to the galaxy (in dollars) and issue bills of millions of dollars and pay their bills in a couple of minutes).
An ECB spokesman said that there are no plans to withdraw the higher value notes, national equivalents of which were used in six member states before the launch of the euro. They will be retained when issuing a new series in the coming years.
Replacing them with lower denomination notes would increase production costs and processing, he says.
Translated from the Spanish version by:
France is used to terminating large-scale contracts, as that was the case of the Russian-French deal on Mistral helicopter carriers