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.

Video below

  1. Dave Holden says

    Some of those interviewers could do a with a little less Red Bull..

  2. Henri Myllyniemi says

    Now there are emergency phone conferences going on, concerning about ECB toxificating its asset books with Italian and Spanish debt. Does this really solve the problem?

    On Greek case there was over a year the assumption Greece is not insolvent. But is Italy and Spain on a road to insolvency as well? The root we look as Italy is heavily indebted as its bond markets are the largest after the US and Japanese ones.

    Half of the country, the southern parts, are not very productive. It’s like Ireland which is mostly medieval land (well almost) with agricultural infrastructure.

    Spain has youth unemployment levels at 40%, or over. Housing bubble is still completely solved and even the big players are facing trouble to maintain repo-lending.

    How much euro would suffer if it “prints” 4000-5000 billion euros after acquiring the toxic waste from the bond markets?

    I am Finn and I am extremely worried looking at this very moment the ECB upholding its repo-lending towards insolvent banks, mainly in Greece. But spreading it to Italy and Spain, in addition to Portugal and Ireland?

    ECB’s burden, before extending risks is about 20 billion euros to Finland, in addition to bail-outs. Now Barroso demands even more. 20 billion is almost 10% of our GDP, and because of these events, Finland is leaking money. From January to May in 2011 our trade decifit ran at 1.3 billion euros, showing accelerating in decifits.

    How long would Finland’s AAA-rating hold? A year?

  3. PBlacque says

    I dont see how the ECB injecting liquidity will solve anything if we’re really talking about a solvency crisis. Yes, it will buy time… hoping growth will do its magic. Just like we hoped it would here but with the results we know. But if Greece defaults (and I believe it will) will that not change a “liquidity” crisis in Spain and Italy (and France) into a solvency crisis too?

    But I also agree that the alternative (the Jim Rogers one) is unacceptable in modern times… so inflation it will be.

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