But the big news is that, with the deal in Italy, the ECB is buying again, and intends to continue buying heavily, as needed to bring the Italian BTP yields under 6%. With pressure off Italy, Spanish yields should lighten as well, though Spain has not been under as much market attack as Italy. Presumably, Greece will get their next tranche as well, in time to pay their mid-December bond bills.
It appears the ECB has successfully played a very edgy game, waiting until Berlusconi had agreed to resign and the austerity deal had been approved, before moving into the market. Effective blackmail, I guess. But dangerous, and not a great way to treat your partners.
As long as the ECB is ready and willing to buy sovereign debt in quantities large enough to keep yields manageable, the liquidity crisis goes on hold. The ECB has said repeatedly that it would not serve as lender of last resort; and Germany has been adamant that it not do so. But as the Italian bond yields ran away last week, they decided they had no choice other than to buy, and buy big. But they will not admit that this is what they are doing and will do. They will not give the market a clear statement that they will protect Italian and Spanish yields. But they will do it. The seasoned observers always said they would.
Does this end it? No - I don't think so.
First there are other potential blowups that might happen almost anytime:
* another Dexia Bank meltdown, as European banks rush to trim their balance sheets to meet the 9% capital requirements
* participants in the 50% Greek haircut deciding not to accept the deal (rumors are that hedge funds are buying Greek debt at 35 cents on the dollar, with every intention of refusing the deal and forcing the dreaded CDS credit event, allowing them to collect 100 cents on the dollar)
* a credit downgrade of France that would blow up the intricate deal to leverage the European Financial Stability Facility (which depends on France and Germany's AAA ratings to generate the leverage)
* Italy and the Troika playing chicken again on terms of their austerity program, causing the ECB to withdraw bond market support and rates to run away again
* a similar scenario for Greece
It's not clear that any of these will happen; but they might, and because of this, markets will be on edge.
The bigger problem is that the current Eurozone structure does not make economic sense. It seemed to be working when interest rates were low, and Northern European capital was willing to invest in the periphery, helping to finance their current account deficit. But following the 2008 crisis, that money has come to a dead stop, and trade deficits have to be financed with public debt. As debt ratios ratcheted up, first Greece, then Ireland and Portugal were forced out of the markets and put into the not so tender hands of the Troika and its fierce requirement for austerity.
But austerity is not working. Demand is falling faster than spending cuts. Instead of deficits declining, they are increasing, raising the debt/GDP ratios. And now the core is slowing down. Take a look at the following charts that compare 2010 Actuals and current Troika estimates with their Spring 2011 original crisis forecasts (all taken from Bill Mitchell's blog):
The 2012-2013 forecasts will not be achieved. Europe is moving into, in fact, probably already is in a recession. And because Troika policy makers are completely caught in their disastrous assumptions that only austerity can work to balance budgets and reduce debt, they will continue to have no sympathy for countries missing their targets, and they will just ask for/require deeper cuts.
This won't work. Something will give and the markets will crack. It helps a lot to have the ECB supporting the market. But it's not enough. The periphery cannot be continually punished and forced to do something that can't work. The leaders have to get together and figure out how to grow, using the ECB for support. If they keep shaming countries like Greece and Italy, it will backfire.
Be careful, Monsieur Sarkozy: you're next.
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