1.3 trillion euro refinancings to tip over eurozone bond market
Posted on 20 December 2011 with 3 comments from readers
The eurozone has only managed to raise 150 million euros for a proposed 200 million euro IMF bailout scheme and the 500 billion Euro Stability Mechanism will not be ready for months. But there is 1.3 trillion euros in bond refinanciing to handle next year in the eurozone.
It puts Dubai’s eight billion euros of refinancing for the whole year into perspective. The sum of 1.3 trillion euros is way beyond any available funding mechanism outside the eurozone bond markets themselves. Yet they will only be able to come up with this money for interest rates that mean many nations will be insolvent.
Madhouse
Borrowing more and more money to prop up a disaster caused by too much debt is never going to work. For the IMF eurozone bailout scheme Spain and Italy may have to go to the European Financial Stability Fund to come up with their contribution. Countries borrowing to finance their own rescue loans is the economics of the lunatic assylum.
ECB president Mario Draghi has derided euro critics for ‘morbid speculation’ but the bank’s inaction only encourages everbody to believe the worst is looking inevitable. Perhaps it would be the best thing.
For the eurozone sovereign debt crisis to be over the most indebted countries need to ‘fail’ and be ejected from the eurozone. Then the stronger survivors could be ring-fenced by relatively modest facilities. A two-tier EU would emerge – which already exists in anycase with 10 countries not in the eurozone – and finances could rebalance to a new state of stability, albeit with a nasty recession as a consequence.
Greek tragedy
Nobody exactly knows how Greece would fare outside the eurozone, or frankly cares very much after all that has happened. But there must be an end to the eurozone sovereign debt crisis and it will be bonds expiring without refinancing available in the first quarter that brings this to a head.
However, this is an unprecedented situation and it is impossible to know how it will play out. Many Americans seem to think the European Central Bank will somehow transform itself into a Federal Reserve at the last minute and come to the rescue. But the eurozone is not a federation of states like the US and the ECB does not have this legal mandate and says so often enough.
Some further downside and volatility in financial markets is probably a considerable understatement for what is coming.
3 Comments posted by readers:
Well said, Ed.
Operative sentences:
1. “Countries borrowing to finance their own rescue loans is the economics of the lunatic asylum.”
Do these lunatics realize that the entire financial world is watching their naked dance?
2. “further downside and volatility in financial markets is probably a considerable understatement for what is coming.”
A few years from now, historians who write about the many disastrous financial decisions by Eurozone politicians will be dumbfounded by their self-serving attitudes, their amazingly myopic views, and their childish schemes.
Did you consider that 3-year LTRO I’ve mentioned in an earlier post’s comment section?
Ed Note: Yes it is rather small for the size of the problem!
There have been a number of happenings this century which seem to lack a legal – or logical – mandate.