You saw the piece I wrote on the likely policy path for European sovereign debt crisis. I was on RT’s Capital Account last night making the same points. Over the last few weeks, it had seemed like European policy makers were ready to just let the whole thing collapse. But now, the game of chicken is over and it seems the Germans and the ECB have blinked. I anticipate a large enough move toward limited fiscal integration in the coming days to enable the ECB to move toward a full monetisation of euro area national debt by the end of the year.
Interestingly enough, the initial reaction by currency markets has been euro strength not weakness. Stock markets around the world have rallied from deeply oversold levels as well. That tells me the markets are more concerned about the impact of a euro breakup scenario than any impact of an ECB rescue scenario. Euro zone sovereign debt, however, will remain under stress until a credible solution is announced and enacted. Obviously, if the coming deal is not credible, we could see the euro zone collapse under the weight of coming Italian debt rollovers.
Video below.