09/13/2012 03:36 pm ET Updated Nov 13, 2012

Overburdening the European Central Bank Is Playing With Fire

Whether it is the futile past and maybe future Quantitative Easing in the United States and the United Kingdom, or the new unlimited commitment of the European Central Bank to purchase Italian and Spanish Bonds, recent decisions of central banks around the world have transformed them from a monetary institution into a credit institution. It is not their nature or their role, and the concentration of responsibilities is strategically dangerous.

In the case of the European Central Bank, there is an added political dimension. Having miserably failed to rein in the European sovereign debt crisis, the European political authorities are literally dumping their responsibilities on the ECB. This is playing with fire: in the global chess game between investors and borrowing governments, concentrating all actions and financial resources in the hands of the central bank is a mistake.

The ECB is now the only fuse that remains credible.

The problem is that it has become vulnerable to variations of confidence in the Euro, the Eurozone, Italy and Spain, and important European Banks. Of course, if the ECB fails, European politicians, in a great Pontius Pilatus gesture, will wash their hands and blame its management. But a single fuse has a characteristic: it affects the entire system.

The European Central bank has become the epicenter of the European systemic crisis. Its owners, the European Union Governments, have not even considered strengthening its capital base. The ECB could, at the next crisis of confidence, be the fuse that will provoke a systemic crisis in Europe.

In a recent article, the Financial Times indicated that 700 billion euros were lent by the ECB to Italian and Spanish Banks since no private funding is available at acceptable interest rates. Its total lending to banks is 1,088 billion euros. Two ailing countries with total debt of 2.6 trillion euros (2 for Italy alone) will now receive an unlimited commitment from the ECB to purchase existing bonds to reduce interest rates. The ultimate European risk is, and has always been Italy. The President of the ECB raised expectations that he does not have the means to sustain. It will soon be obvious, and it is not good news.

After the European Central Bank lent 1 billion euros to the banks at 1 percent for 3 years, accepted weaker collateral, will now assume an "unlimited commitment" to reduce interest rates in Italy and Spain by buying their sovereign bonds, become the primary lender to Italian and Spanish Banks, and, on top of that, as announced by President Barroso, become the ultimate supervisor of over 6,000 European Banks, it can only disappoint, or worse, fail.

The stage is now set for a 5 trillion euro battlefield.

Between investors and Europe, the stake combines the current risk of the ECB balance sheet and the Italian and Spanish risks. With the only financial resource of 700 billion euros at the European Monetary Stability and the ECB for the balance, such numbers are simply unbearable.

Will it fail? Not necessarily, since investors might ultimately decide to trust Europe and not fight the battle. But with the combination of political turmoil in some countries and demonstrations in others, the ultimate stakeholder is the people. Nobody controls them. The opaque austerity program put together by the Troika (ECB, European Commission and the International Monetary Fund) is targeting the low hanging fruit: reducing pension and salaries, and creating desperation. Desperate people have nothing to lose: let's not forget how the Middle East revolutions started.

European politicians, and even the ECB, are in denial on the amplitude and concentration of the systemic risk, as well as its possible containment. If the fuse of the ECB bursts, it is the world economy that will collapse. Do they really believe that investors and markets are blind?

Will the Federal Reserve be pushed in the same trap?

While I sincerely hope I am wrong or too pessimistic, I confess that I cannot understand why any responsible Government would ever take such an uncontrollable risk. Don't laugh: this is exactly what the U.S. Congress has done over the past two years, dumping its responsibility on the Fed. The wake up call for the new Congress will be brutal. I sincerely hope they will not transfer their responsibilities on the Federal Reserve, although it is exactly what Ben Bernanke seems inclined to do.

Here the stakes are above $ 15 trillion.