The ECB must stabilise European debt markets
Here is the CNBC video on the European debt markets I promised to post on Friday. I believe the larger European debt crisis is a solvency crisis, meaning there are almost certainly going to a greater level of sovereign debt writedowns in Greece and likely beyond. But, after the markets’ biggest drop since the panic in 2008, it is clear the present melt-up in Italian and Spanish bond yields has all the hallmarks of a classic liquidity crisis.
The European Central Bank is now deciding how much liquidity to provide because it has received a quid pro quo from Italy that some analysts knew were necessary before the ECB would provide any liquidity. We will see soon whether this will be enough. But clearly , since the ECB has unlimited liquidity it could backstop any and all euro-denominated debt issuance if it so chose. The questions now go to how much liquidity the ECB is willing to provide, how much moral hazard it is willing to risk, and what specific conditions it will require before it provides any liquidity at all.