Last week's earth-shaking eurozone event was ECB Executive Council member Juergen Stark's announcement that his employer would not be providing the medicine to cure what ails Greece's national finances. That the final result of this latest German exercise in reasserting dominion over the fiscal moral high ground was both a substantial lowering of the Greek 10-year yield and, product of the seeming petrification of the bund at 3.39%, an identical 25 bps shrinking of the appropriate spread as well as an interday rise in EUR/USD of 0.3% should, rather than the home crowd haranguing of a Bundesbank minion, be the item of interest to Europe watchers and pundits.Looking at the chart of eurozone spreads on the left (and ignoring Ireland for reasons described below) the bund was the all-round loser on the week. To say the least, the effect was counter-intuitive.
Our own suggestion is that the first decade ECB interest rate policy that so much accommodated Germany's special interests at the time, whilst fueling various undesirable outcomes in theologically lesser states, is turning out to be at least equally disastrous for that country. We do not accept the Teuton argument that the profligate ways of the community of drug addicts is fundamentally responsible for the collapse of the heroin trade. Germany got the interest rates it needed - as both a manufacturer and a seller - to export its way out of the morasse of unification. Despite tough talk from the likes of Mr. Stark, the market knows who has the most to lose from a limit situation.
One has to wonder what utility the maintenance of the fiction that EMU countries are actually independent states serves.
We rolled the Irish bond from the 2019 to the 2020 in conjunction with the new year and haven't gone to the trouble of doing it in a way that creates a generic item. We may or may not actually get around to it. Week-on-week changes should have some significance from this point onwards, although nominal values will continue to be out of whack for a while.
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8 Comments:
Charles - I think that it is an anti-lost decade sentiment. That is, the ECB saying that it won't help means that a lost decade for Greece, a la Japan, is a lot less likely, and so positive for Greek spreads. Just a theory...
David
CB,
I still think I believe the fiction. Greece and Ireland are small enough to be bailed out, but it stops there.
I just updated my blog with a chart of yields without realising you had just done the spreads!
Un saludo
I think the degree of walk-back from the people who actually have the power to make bailout decisions (vs Juergen who has none) helped a lot.
With both France and Germany suffering in 2002, the ECB choices weren't really that controversial. I remember at the time, the ECB getting all kinds of flak for not lowering as fast as the US.
With separate currencies, would Greece, Ireland and Spain have been responsible enough to raise their rates to keep things under control? Probably not. Who wants to stop the party?
Even if they had, I shudder to think of what might have happened here in Spain if people had started taking out their loans in DMs instead of pesetas to take advantage of lower interest rates.
David,
Eternal optimist?
bsanchez,
The corollary of that is that Spain is too big to fail.
santcugat,
I know someone who lost a house in Madrid to a yen-denominated mortgage about 15 years ago.
As for devaluation, there was an implicit undervaluation of the EUR/GBP, brought on in part by German-controlled rates. Imagine what the euro would have quoted at had Spain been the dominant economy. The costa del sol would not have been nearly as appealing.
I just don't see an interest rate option that would have resulted in an more optimal outcome.
Destroying the German economy to keep Spain from overheating doesn't make sense.
There are many things Spain could have done to keep a lid on property prices, but for some reason or another, chose not to.
I think separate currencies create more issues than they solve. Especially now, as economies are becoming more correlated, the old trick of devaluing and recovering via exports doesn't work if everyone is doing it.
I think after a few too big too fails we will reach the point where things are too big to bail out.
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