…turns out to be Trichet, this week, anyway; the bond markets are soothed. Two key comments:
We have got a monetary federation. We need quasi-budget federation as well.
a statement which ought to have all the Eurosceptics, and many others, chorussing “told ya”; then
Mr Trichet also hinted that the ECB could extend its purchase of government bonds, a controversial move within the ECB governing council, saying he could not discuss the issue “at this stage” but that further decisions on the programme would be taken by the board.
The bond markets, which had brushed aside the Irish bailout, and were clobbering not only Greek, Irish and Portuguese debt, but also Spanish, Belgian and even Italian, took a hint that at last there would be a bid somewhere for the less exalted Eurodebt, and backed off. Whether Trichet’s bond purchase programme turns into the EUR2Trillion monster now envisaged by market participants, or not (the ECB has only purchased EUR70Billion of bonds so far, which doesn’t imply great willingness to go down this path), we have at least a pause in what, on Monday and Tuesday, looked ominously like a slide towards panic.
So what now? Securing Eurozone-wide “quasi budget federation”, whatever that turns out to be, between 16 differently-economied sovereign states, isn’t going to be an overnight job, particularly. So in the short term the first question is whether the ECB really will do “whatever it takes” to support periphery funding. Readers will remember that Weber of the Bundesbank in particular is not a fan of this kind of intervention; he is pro-bond-haircut, and Merkel echoes him. If he pipes up again, and looks supported, the bond markets will freak out again.
There are plenty of other background fragilities too, to go with the contradictory official statements that are part of business-as-usual in Euroland. There is the challenge to the constitutionality of the Greek bailout, still trundling along in the Bundesverfassungsgericht in Karlsruhe. That could take years to get settled.
There is still Ireland, with its improbable bailout, its possibly ruinous 4-year plan, its fragile government, and its deeply disillusioned electorate. Ireland still has to pass the budget, elect a government that campaigns on a promise to stick to it, deliver the cuts, and then grow at a rate that pays off the interest and capital on the debt. December 7th, budget day, is one hurdle, but that process could fail at any stage, earlier or later.
Then there’s Greece, and Portugal, and perhaps Spain. The periphery countries may all have a solvency problem, as articulated by Willem Buiter with his usual vim.
Just to top it off, and to illustrate why haircuts give everyone the heebie-jeebies, the FT has dug up an interesting coupling between the periphery countries. Summarizing, it turns out that Irish banks are among the leading lenders to Portugal, Greece, Spain and Italy; foreign banks’ use of Dublin’s financial centre as a low-tax conduit for business (the German bank DEPFA above all) just adds to the coupling. So default, or haircuts, by any of those countries stand a chance of taking out Ireland too (which would give the UK a fair-sized headache, as well).
Anyhow, ECB funding programmes won’t fix any of that. Handouts or haircuts: the next stage of the political debate in Euroland will have to deliver a choice, and a plan, unless electorates get there first (probably without much of a plan).