Elga Bartsch, a ECB shadow council member and Chief European Economist at Morgan Stanley, talked to Bloomberg about the sovereign debt crisis today. She said that the ECB would be hard-pressed to do a 180 on its hawkish tightening position from July toward potentially buying up euro zone member sovereign debt. In her view, the “need for action” is on euro zone members in implementing the reforms that they committed to in July. Bartsch says fiscal austerity and privatisation come first.
I imagine this is exactly what the ECB thinks, meaning it believes cuts and reforms must come first. Market players see this as well and realize this will mean either political dithering on fast tracking reforms or slow growth and contraction in the future right across the euro zone. That is one reason why equity markets are selling off today, especially Italy.
Bartsch believes the ECB can step in at any time if need be. I believe the bond markets will push Spanish and Italian rates higher and higher and draw Belgium and potentially France and Austria further into this before the ECB makes any move. This is bullish for bonds in the US, Germany, Finland, and other countries where rates are now dropping but it is bearish for equities, bearish for high yield bonds, and bearish for bonds in the periphery.
Update 1358ET – Note: The FT is out with a story that the ECB is already buying Portuguese and Irish sovereign debt in the secondary market. But I think this is ridiculous since the story is about Irish and Portuguese debt which had actually already been dropping. It should be Spanish and Italian bonds. If the ECB were to confirm intervention with Spain and Italy, expect the euro to drop.
P.S. – the currency wars are on again because we now see monetisation from the Swiss, the Japanese and the ECB. Can the Fed be far behind?