Another much-ballyhooed bazooka fails:
“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day. “The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”
Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds. This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.
And here is a perfect example of the inherent danger – and stupidity – in centralizing any form of power. In the pre-Euro days, Greece could have devalued the drakhma and relieved the pressure on its bond market. The effects would have been negative, but limited solely to Greece. Now, thanks to the centralized structure of the EU, the bail-out expense threatens the pocketbooks of Germans and the debt contagion threatens Portuguese, Italian, Spanish, and Irish bonds.
The worst thing is that the proposed “emergency” solution involves further centralization, which involves kicking the problem down the road for a while. This means that when the debt issue resurfaces, it will threaten the ECB directly. The ECB would be wise to do what the Fed did not have the courage to do and let Greece default. Unfortunately, wisdom and central bankers appear to be mutually exclusive concepts these days.
I am amused by the continued expansion of the financial analogies, though. First the Fed had a “gun”, then the EU had a “bazooka”. Now the ECB has a “nuclear option”. But, like previous analogical armaments that were brandished so futilely, it can only be perceived as effective so long as it isn’t used. It’s an empty bluff, just like all the previous ones.
Here’s a few more details on the latest in the ongoing Euromeltodown:
ATHENS — Greece was pushed to the brink of a financial abyss and started dragging another eurozone country – Portugal – down with it Tuesday, fueling fears of a continent-wide debt meltdown. Stocks around the world tanked when ratings agency Standard & Poor’s downgraded Greek bonds to junk status and downgraded Portugese bonds two notches, showing investors that Greece’s financial contagion is spreading. Major European exchanges fell more than 2.5 percent, and on Wall Street, the Dow Jones industrial average finished down more than 200 points. The euro slid more than 1 percent to nearly an eight-month low.
“We have the makings of a market crisis here,” said Neil Mackinnon, global macro strategist at VTB Capital.
Greece is struggling with massive debt, and with prospects for economic growth weak it could end up in default. Its 15 eurozone partners and the International Monetary Fund have tried to calm the markets with a euro45 billion rescue package, but it hasn’t worked.
Standard & Poor’s warned that holders of Greek debt could take large losses in any restructuring, but a greater worry is that Greece’s debt crisis is mushrooming to other debt-laden members of the eurozone.
One bailout can be dealt with but two will be stretching it, and there are fears that other weak economies could be pulled down in the Greek spiral – including Europe’s fifth-largest, Spain. Can Germany, Europe’s effective paymaster, continue to bail out the weaker members of the eurozone?
The crisis threatens to undermine the euro and make it harder and more expensive for all eurozone governments to borrow money.
It has also disrupted cooperation between eurozone governments, with Germany resisting the idea of bailing out Greece unless strict conditions are met. Many investors think Greece will have enough money to avoid default in the coming weeks, but the future is cloudier. Both Standard & Poor’s and the Greek finance ministry insisted that the country will have enough money to make the euro8.5 billion bond payments due on May 19.
Beware the post-Ides of May….