Saturday, October 29, 2011

Euro Bailout

The recent Euro Bail Out was greeted with some relief by markets. At least European leaders could agree on something. But, bond spreads have continued to rise and the fundamental problems remain.

Some notes from the recent bailout.
  • Firstly, as many widely expected a European country (Greece 50% cut in debt) has defaulted on its debts for the first time since after Second World War. This is still quite a significant milestone sovereign debt default in an advanced country is very rare. - Note for many months, the EU had hoped to muddle on and avoid Greek debt, but this just shows a misplaced optimism.
  • Now sovereign debt default is a reality, investors will be repricing many other countries debt. It is likely to put increased pressure on Portugal, Italy and Spain and lead to higher bond yields.
  • The bailout does nothing to tackle the collapse in money supply that is occurring in countries like Portugal. As part of the deal, the Germans insisted that the ECB stop any bond purchases. (Presumably we still have to worry about inflation despite a collapse in the money supply and nominal GDP that is occurring in the south of Europe)
  • A new dynamic is that The EU are hoping that China will become a major beneficiary of the new EFSF fund. China will demand in return free access to European markets and freedom to buy advanced technologies. No mention was made of political issues like human rights abuses, but if China is to become the EU's saviour expect the EU to suddenly go quiet on issues such as Tibet.
  • As part of the new deal the EU has new regulations with the powers of 'rigorous surveillance and laws enforcing balanced budgets. Just what you need when when you've got a deep recession, some EU commissionaire to impose more spending cuts and austerity on you.

What The Bailout doesn't do
  • This deal doesn't solve the 30% gap in competitiveness between the North and South. The EU kind of hope that a decade of 'internal devaluation' will eventually restore competitiveness. This means a decade of mass unemployment and stagnant growth.
  • It Forbids any chance of monetary stimulus to help the beleaguered south escape debt deflation and mass unemployment.
  • There is no fiscal union just a 'stability union' There is no joint bond issuance only greater scrutiny of other countries debt.
Video Animation on Bailout

1 comment:

Ralph Musgrave said...

What on Earth is the point of the Eurozone borrowing money from China when the ECB can print any amount of money it wants anytime? Of course the effect of the ECB printing money donating it to indebted Euro countries and/or the banks holding those countries’ bonds is likely to be inflationary (absent some compensating deflationary instrument), but you’d get exactly the same inflationary effect from borrowing money from China and throwing it around all over the place.

Or have I missed something?