Can Europe step back from the brink of serious financial Armageddon?
This clip is from last night on The Alyona Show on RT Television. When you run through the scenarios, really the only medium term solution that makes sense is to allow the ECB to put a permanent bid on Italian and Spanish bonds. These nations are solvent at lower bond yields and therefore deserve more time to meet the Maastricht criteria at non-panic yield levels. The problem with such a move is that it reduces pressure on those governments to make the kinds of reforms that countries like Germany feel are necessary to ensure longer-term euro area convergence.
Video below
Prepare for the worst and hope for the best is the only strategy worth considering right now.
If the ECB puts a bid under periphery bonds, aren’t they instantly and glaringly insolvent unless they are recapitalized or monetize the debt. How long can the Fed lend to them until they do? Assuming they act in a timely manner and lean more towards monetization (the quicker solution), suppose EUR/USD tanks. Aren’t there huge short-term funding risks?
The ECB’s goal will be to set a price floor/interest rate cap without buying bonds. See here: https://www.economist.com/blogs/freeexchange/2011/11/euro-crisis-7
Methinks the bond markets would like to test that “cap” enthusiastically.
Agreed. The ECB would probably have to be very aggressive initially. They could, for example, set a wide range of 50-75 bps the way central banks target policy rates and let the market drift up to the upper end of the range only to bid it down to the lower end again and again. After a few rounds of this, speculators would get the point.
The truth is a fiat currency is one that is created and controlled by government and they can dictate terms as they see fit. I think it is preposterous not to have a national lender of last resort but having government dictate price levels is equally preposterous. That’s where we are.
I’m not sure whether you’re saying they can hold the floor, assuming they even get to that point. BOJ and SNB don’t need 17 countries to agree on a recap if currency intervention doesn’t work. Neither does what they’re pushing against (a rise in their currencies) cause them problems with the Fed. Breaking the ECB ought to be a generational trading opportunity, and you’d think some hedge fund managers will be smart enough to make it happen, no?
Right, there are risks. See Gavyn Davies saying that here: https://blogs.ft.com/gavyndavies/2011/11/10/does-the-ecb-really-have-a-silver-bullet/
I think that the better solution, though it may not be taken is to allow the ECB to buy up all the spanish and Italian debt as Gavyn Davies suggests. That would end the speculation about the rest of the Eurozone, and allow losses in the rest of the periphery to be taken. It still does not solve the problem of excessive debt throughout the world.
His commentary is really no different than mine actually. This is where I am headed:
https://www.economist.com/blogs/freeexchange/2011/11/euro-crisis-7
My concerns are that governments are being offered a one size fits all policy. Austerity does not work. Though reforms should be encouraged. Pension reforms are essential, and reforms of parliament helpful. Cutting the budgets of parliaments so ending the gravy train will be popular with the public. Each country needs different solutions. Without the EU running deficits the only way out is a collapse in asset values. That will hurt the banks as they are heavily leveraged to assets. People are angry and if the EZ plan of replacing elected leaders with technocrats spreads you can see the public revolting. Under those conditions forget any debt recovery. That will lead to a credit event. Then there will be financial armageddon.