Wednesday, November 09, 2011

Days, Not Weeks

Today Ryan Avent wrote the post that I had been intending to write myself. So I will simply turn things over to him (though please click through to read his entire comments):

SILVIO BERLUSCONI'S promise to resign has done nothing to calm European bond markets. Italian bond yields are soaring today; both the 2-year and the 10-year are above 7%. There are rumours that the ECB is in the market and buying heavily. If so, it's not having the desired effect. The ECB can't hope to keep yields reasonable through brute force. It will need to make an expectations-changing announcement. Will it? Italy's yields aren't the only ones rising. Markets are ditching Irish, Spanish, Belgian, and French debt too.

...I have been examining and re-examining the situation, trying to find the potential happy ending. It isn't there. The euro zone is in a death spiral. Markets are abandoning the periphery, including Italy, which is the world's 8th largest economy and 3rd largest bond market. This is triggering margin calls and leading banks to pull credit from the European market... The cycle will continue until something breaks. Eventually, one economy or another will face a true bank run and severe capital flight and will be forced to adopt capital controls. At that point, it will effectively be out of the euro area. What happens next isn't clear, but it's unlikely to be pretty.

...I hate to get this pessimistic about the situation. It feels panicky and overwrought. I can't believe that Europe would allow so damaging an outcome as a financial collapse and break-up to occur.
I wish I didn't agree so completely with Ryan's assessment. The ECB is the only institution that can put a stop to this. And they have days, not weeks, in which to decide if they are going to do so.


  1. "The ECB can't hope to keep yields reasonable through brute force. "

    Of course it can
    It just has to buy them all....

  2. Anonymous3:03 AM

    If the ECB plans to be the deep pocket buyer of last resort, then they'll end up with trillions on their balance sheet and every country that was supposed to implement austerity will back off and let it all get dumped on Germany. 

    The banks have too many bad assets for the sovereigns to absorb.  Some institutions need to be let go.  The sovereigns are too near-sighted to realize that they've gone too far and can't recover now.

    Actually, it's what Germany deserves for being so foolish.