Sunday, March 11, 2012

Europe kicks the can, following the American way

By Bill Wilson

Is the European debt crisis over?

Since the latest €130 billion bailout of Greece was agreed to on Feb. 21, rates on Italian and Spanish debt have seemingly stabilized, dropping from 5.44 percent and 5.11 percent respectively to 4.8 percent and 5.05 percent.
Granted, yields on Greek debt are still climbing upward. 10-year bonds over 36 percent. 1-years are over a gargantuan, ludicrous 1,020 percent.

That is owed largely to the nature of the Greek deal. Although €140 billion of Greece’s €340 billion debt has been guaranteed by the European Financial Stability Facility (EFSF), International Monetary Fund (IMF), and the European Central Bank (ECB), private holders of the remaining €200 billion have “voluntarily” taken a 50 percent haircut, a technical default.

That alone likely explains the rising pressure on Greek yields. But what about the dropping Italian and Spanish rates?

While those have dropped off some since the Greek bailout was agreed to in Feb., the peaks in rates for Italy were actually in early Jan. at 7.16 percent for Spanish debt were actually in late Nov. at 6.7 percent.
That was about when the ECB was stepping in with a massive long-term refinancing operation: over €1 trillion of loans at about 1 percent to financial institutions to purchase higher-yielding government debt.
So, the “solution,” such as it is, was for the central bank to print hundreds of billions of euros to lend to banks, who in turn lent it to the governments, rolling over hundreds of billions of Italian and Spanish debt.
Not that surprising. In the U.S., we’ve been doing that for years. Today, financial institutions — privileged primary dealers — can borrow at close to zero percent from the Federal Reserve and use it to lend to the federal government, earning about 2 percent, the current 10-year yield.
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