The ECB's new policy is enabling Mariano Rajoy, Spain's new leader, to borrow money at much lower rates
Last week, leaders of the Eurozone met to seek a solution to their debt and liquidity problems. At first blush, their major solution to the problems-tighter economic and monetary integration-appeared incapable of dealing with the mountains of debt and liquidity crises faced by countries such as Italy, Greece and Spain.
However, one little-recognized measure they took now appears to be helping them to manage the crisis. The European Central Bank (ECB) agreed to lend massive amounts of money to banks in Eurozone countries to “ensure lending does not dry up”.
It appears though that the hidden intent was to “encourage” these banks to buy sovereign debt using the very same monies lent to them by the ECB at low rates (1%) and make a profit through this ‘carry trade’.
>>Five Reasons Why the Eurozone Will Not be Allowed to Fail
Everyone then is happier. The Germans are satisfied because the ECB is not directly buying debt and tighter integration will allow greater control of each country’s finances, to avoid the problems that got the Eurozone in trouble to begin with.
France and the other Eurozone countries are also happy as the immediate crisis – rapidly rising rates of borrowing – has subsided. Spain’s just sold three-month debt at an average yield of 1.735%, compared with 5.11% at an auction on November 22nd. It also sold six-month paper at 2.435%, down from 5.227% last month.
Providing unlimited funds through this back door method basically prevents the speculators from bankrupting countries. The banks make money and weaker Eurozone countries are given breathing space while their reform their profligate economies.
The success of this measure will be in whether countries such as Italy and Spain continue with their reform processes and do not slack off as the immediate liquidity crunch ebbs.
For the U.S., with its strengthening economy and pickup in hiring, a non-imploding Europe will ensure that the recovery gains stronger momentum in 2012. We are not in the clear yet, but if the Eurozone stabilizes and China manages their own emerging lending crisis, 2012 may be a very strong year for the U.S. economy.
Recent Comments