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Tuesday, September 21, 2010

Fringe Eurozone Debtors Start To Creak


The ECB bail-out programme is stuck.  Germany would not permit loans to be made to the indebted countries in sufficient quantity to ease the pressure on their governments.  The sums being lent by the ECB are becoming a drip-feed, just enough to keep the patients alive, but not enough to bring about recovery or stability.  The loans are issued against IOU's from the countries such as Ireland, Greece and Portugal, and these are falling in value progressively as long term interest rates rise.  These falling values could ultimately threaten the security of the ECB itself if it were to get too heavily involved.
Greece's long term borrowing costs are now at 12%.  Ireland's half that but rising.  It's like watching a glider crash with the aircraft riding a current of warm air which is not quite enough to maintain altitude, and which has only slowed the rate of  descent.
The Wall Street Journal writes -
Higher financing costs compound the difficulty of bringing gaping budget deficits under control. Ireland's central-bank head, Patrick Honohan, warned Monday that although Dublin has taken "prompt and painful steps" to trim its deficit, the economy and interest rates "have evolved in a less-favorable way."


In other words, he knows Ireland is fighting a losing battle.



"Recent movements in the yield spread on government debt...readily demonstrate the costs that can result unless international lenders remain convinced that the budget is going to be kept on a convergent path," he said in a speech.
Analysts say they expect ECB debt purchases to continue at their current level. Elevating them back up to several billion euros a week would likely spark renewed opposition in Germany, where both the central bank and the public were against buying government bonds, Mr. Annunziata says. In addition, he says, the ECB may want to "keep up the pressure" on governments to stick to their austerity pledges.

The Irish Taoiseach Cowen is showing the signs of strain, recently giving a radio interview in the early hours while still suffering from the effects of a heavy night of drinking.

Yet ending the program altogether would add even more instability to already volatile debt markets. "It would create a lot of uncertainty," Mr. Annunziata says.
No one is talking about where this is all heading.   One day someone somewhere will hit the ground, unless the world economy can grow fast enough.  The NEBR in the US stated yesterday that the recession which started in December 2007 ended after 18 months.  Yet not one indicator has risen back up to above the level of December 2007, or even near it (see charts at bottom of previous post about Americans being driven nuts by a long recession).  Employment especially continues to sag.   Let's be realistic.  The outcome of all this is not likely to be favourable.  But that will not be stated in any news media, with so much effort going into convincing people to keep buying risk assets, and into keeping confidence off the floor.

The political consequences will be severe.  The eurozone is unlikely to survive.  The EU could fracture.  It will be a dangerous moment when it comes.  The Lehmans collapse will be as nothing to the arrival of sovereign default in Europe.

UPDATE - News of troubles within Spain and Italy have been heavily suppressed.  The idea is to direct the eyes of the inquisitive towards the smaller fry, and then say that they won't make much difference to the big picture.  It all hangs on being able to keep the illusions of recovery going. 

4 comments:

The Boiling Frog said...

Instead of pulling off the plaster quickly the EU is trying to do it slowly in the misguided hope that the pain will be less. It never is.

The outcome will still be the same.

Tapestry said...

Hi Frog. Perhaps I should've said 'start to croak'!

The Boiling Frog said...

News of troubles within Spain and Italy have been heavily suppressed.

Am intriuged, where have you heard this from?

Tapestry said...

Just observation. They wanted to undo the potency of the PIIGS acronym, and so all news channels which used to mention Spain and Italy, alongside Portugal Greece and Ireland no longer do so. Big loans must have been made to these two, but most of all they have simply disappeared off the PIIGS radar without explanation. Just news management.