August 21, 2012 · 0 Comments
A new note out from Citi’s Steven Englander tries to assess the latest state of play with regardes to ECB bond buying, the Greek situation, and so forth.
It’s all solid, but the red highlighted line at the end is fantastic.
An article in Der Spiegel over the weekend discussed a potential ECB intervention to cap peripheral bond yields. A more recent report sent out overnight shifted gears in addressing how the Eurozone prevents contagion in the event of a Greek exit. Dealing with Greek exit could be the more pressing Eurozone issue, because contagion has to be stopped on the spot if Greece leaves, or tremendous damage will be done. A couple of months of excess financing costs are not pleasant, but are not fatal either, as German policymakers have been at pains to point out.
Several clients have suggested as well that the ECB bond buying discussion may be more motivated by Greece than by Spain, even if it could be justified by either. The article raises three possibilities for dealing with Greek exit: 1) unlimited ECB buying, 2) an ESM banking license, and 3) Eurobonds. The argument is that if Greece is exiting you need an unbeatable policy recipe to prevent contagion or else you end up with the kind of financial market panic that the US did when Lehman’s went bankrupt without adequate policy preparation for dealing with the aftermath. Nevertheless, as the article notes, each policy has side effects and can affect incentives in an undesirable way. The big bazooka metaphor is wrong – the battle is not won by the biggest bazooka, but by the one that has unlimited ammunition.
This is indeed the lesson of the crisis and the US banking one.
You can talk all you want about creating funds, and so forth, but what ends the crisis is when the party with unlimited ammunition (in this case the ECB) finally decides it’s just going to stand there and put at an end to it.