ECB = European Central Bank
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Love the explanation, thanks!
I'm going to repeat some of these concepts, but hopefully with a more expansive viewpoint.
1. could you pls elaborate a bit abt ECB..have heard a lot abt it these days and wht does bailing out means and why ECB would bail out ( m sry to me it's nt clear above who did US managers think they would be bailed out by ECB)
=> As mentioned, the ECB is the central bank for Europe. Why do countries need a central bank? Well, normally a central bank is looked at as the 'lender of the last resort'. This means, that when there is bad shit happening to the country, the central bank can step in and correct it. Here's a hypothetical look at how this happens:
Imagine you owe money to people and you realize that you're totally out of money by the middle of the month, and your salary won't even be enough to cover your debts. You turn to your dad for the money. Of course, your dad will be annoyed and probably eat your brains. But at the end of the day, he knows that if you don't pay your creditors, they're going to break your legs and teeth - and that paying for your dental work and orthopedic work is way more costly in the long run than paying off your debts right now. Plus, it looks terrible to have a son with a black eye. So your dad pays off the debt for you. But what if you had a LOT of debt. Like Billions of dollars? Well, if your dad was really the strongest? (Like the RBI or the Fed or the Saffola Oil dad), Well, then he could print you all the money you needed to go and pay off that debt. That's a lender of last resort - he can print money for you so that you can pay off your debts in the interim.
This also is a 'bailout'. It prevents you from being bankrupt. When countries go bankrupt and are unable to pay their debts, their punishment is usually that they can NEVER borrow in the international markets again. Like Argentina! And the domestic investors usually don't have the kind of ability to lend like international investors do - so defaulting on your international investor is a terrible terrible thing to do
2. The Fed, the RBI and the ECB - although 'Central Banks' - have differing objectives. The Reserve Bank of India is in control of bank reserve rates, foreign exchange trading and other monetary indicators. The RBI's goals are diverse and range from ensuring that inflation is controlled right up to controlling the the rupee / dollar exchange rate. The RBI's primary mandate is to ensure the growth of the country without hyperinflation. The RBI has the power to step in and prevent a bank from failing (if the bank was very important - like if SBI were to fail)
The Federal Reserve is also tasked with similar objectives, except for the dollar rate. The Fed normally lets the dollar float completely as per what the demand and supply is.
However, the ECB is tasked with not letting inflation spiral out of control. It does not step in and print money to save the european banks. Why does it do this? Well to prevent what is known as 'moral hazard'. Since the eurozone is made of different countries, politicians in different european countries would allow their banks to lend to everyone for no reason - making their citizens very happy. But this is bad banking, and bad loans would pile up - causing the banks to fail. Then the politicians would ask the ECB to step in to save the banks. Moral Hazard.
So, the ECB just doesn't step in that way - preventing the politicians from having a 'daddy' they can go to if everything goes bad.