Daily commentary: The ECB will step in soon or we will suffer another Great Depression
The euro zone sovereign debt crisis is reaching the end of the line. Spain and Italy are both simply too big to be bailed out. Yet as we speak, the yields on Spanish and Italian 10-year bonds are soaring, Spain’s reaching a record 6.807%. There is absolutely no bailout package the EU can put together to get this under control now. Spain and Italy are too big to bail. But they are also too big to fail, meaning that a default would usher in a dark economic period globally, another Great Depression.
In my newsletter post at the start of the year, I made ten predictions. The last and most important one was this one:
The ECB becomes more explicit about its backstops: As I write this, Italian interest rates are now edging over 7%. The question, especially when the Italians have to roll over so much debt, is how do they continue on in that environment? The answer is they can’t. If Italian yields stay at 7% for too long, everyone not just some bond investors will start to believe they are essentially bankrupt. That gets you into Greece territory. Bottom line: the ECB will then face a stark choice. Make their Italian backstop more explicit or go through a debt deflationary and depressionary crisis and cease to exist as an institution as the euro unwinds. I think they will choose inflation.
We are now at this point, with Spain being the country in most trouble, ahead of Italy. And the remaining countries in the euro zone simply are not large enough to bail out Spain and Italy. Those two countries could default or get a debt restructuring. But the carnage that would unleash would be worse than Lehman Brothers, ushering in a 1931-style bank run. The only alternative is for the ECB to make explicit (temporary) support for Spain and Italy as I predicted they would have to do before the year was out.
Will they do it… or will we we face a second Great Depression? Those are the choices.
That’s it Here are the links.
Sad news for peak oil disciples | Energy | News | Financial Post
DEAR APPLE: You’re Winning, So It’s Time To Stop Acting Like Jerks – Business Insider
Austrian minister says Italy too may need bailout | Reuters
BBC News – Pensions deficits reach new high, says PPF
Troika to supervise Spanish bank loan – FT.com
BBC News – India’s industrial output grows less than forecast
Detroit’s fiscal situation gets hotter | MuniLand
Spain’s economy – OECD Observer
Just How Fake Is HGTV’s House Hunters? – The Consumerist
Analysis : The ever-diminishing returns from Europe’s bailouts | Reuters
Edward, what is your take on the June 8th, Foreign Affairs article “The World Waits for Germany” ? Here is there closing summary:
Germany is both devoutly anti-reflationary and leadership averse, which is the worst possible combination at the worst possible moment. It would be nice, to use an American expression, for Germany to step up to the plate and put its full economic weight behind a fiscal and a banking union, including euro-denominated sovereign debt. But for reasons of history and ideology, as well as political and economic context, Europe may well be about to re-run Kindleberger’s 1930s, with the ECB in the role of the British and the Germans playing the Americans. And should the global economy go down that route, there is a lot more at stake than the existence of a fiat currency.
TIA daveinSV
I haven’t read the full article but the synopsis you excerpted sounds spot on. Germany is devoutly anti-reflationary indeed. However, they fail to realise how sinister the deflationary dynamics are. At this point, with Spain and Italy at risk, there is nothing the Germans can do except encourage the ECB to defend the bonds of those countries. That’s Europe’s only hope at this point.