Why? If something else goes wrong, they'll just change the rules again. I wouldn't be terribly surprised if there will be some relaxation of the ECB's wiggle room down the road if those pesky "speculators" don't get out of the way.
Well, it's not about the rules. The plan, as it has been set out, generally authorizes the EFSF to do a lot of things (e.g. bank recapitalizations, etc) and that part of it is certainly positive. Moreover, the ECB has signaled that they're gonna play ball. So, like many things that have been done throughout this crisis by the Eurocrats, it looks OK on paper and in theory. The big problem with the current plan is that it's puny in terms of size. It might be enough for Greece, Portugal and Ireland, which is why the idiots in Brussels are celebrating. However, they still don't get the simple fact that the problem has evolved and it's not about Greece, Ireland and Portugal any more. If you want to rescue the EU, you need a credible backstop for when Spain and Italy start to wobble (which is what we observed last week). EFSF, with its effective lending capacity of only â¬225bn, is nowhere near enough (Italy alone needs to re-finance arnd â¬250bn+ of debt per year, of which arnd 45% is held externally). I believe that's why, after the initial euphoria, Italy started to widen back out on Friday, as real money resumed selling. So yes, you're right, Locutus, they'll probably keep changing the rules. However, have you noticed the ever escalating dynamic? The speed of contagion keeps increasing, while the effectiveness of official "solutions" doesn't. Moreover, it looks like the negotiations are becoming increasingly acrimonious, chaotic and difficult. All this increases the risk that one or several of the participants will conclude that the costs of holding on to the Euro are too high and that it's cheaper to walk away. Personally, I have been getting increasingly pessimistic (as you may have observed from my posts).
"EVEN FOR NOW", why? Would you care to elaborate please? What could go wrong between now and say Dec. 2011?
2 quick questions: 1) They said the reason that italian bank like SPA is being "run" on, is because those 2 Italian banks ask the Italian govt. to buy back their greece own bond, and now that the greece situation is resolved until 2013, there is no more contagion from Greece to Italy. Now, doesn't that fix the situation in Italian banks? 2) Is there a link on Italy CDS and their bond yield?
All of these countries will need to be refinanced multiple times over the coming years. And as the inadequacies of each round become obvious the doubts about Spain and Italy will increase. Confidence is a delicate asset and Martin is correct: It takes huge money to backstop the larger economies. Ireland, Greece and Portugal are small potatoes. Spain is a main course and Italy is a big freakin' deal. All of these societies are insolvent. The issue for each is not just liquidity but actual insolvency. The end game, whenever it comes, will result in significant write downs of principal. The debt is not money good and all the players understand that.
1) Not really. The mkt punishes Italian banks because of the Italian sovereign and the expectation of potential deposit flight. 2) 5y Italy sov CDS: http://www.bloomberg.com/apps/quote?ticker=CITLY1U5:IND 10y BTPS yield: http://www.bloomberg.com/apps/quote?ticker=GBTPGR10:IND Pls note that, given everything occurring recently, I would caution against using sovereign CDS.
Well, in terms of insolvency vs liquidity, I would agree that it applies to Spain, but Italy is a bit different. To paraphrase a famous writer: "Happy sovereigns are all alike; every unhappy sovereign is unhappy in its own way". At any rate, it's reasonably clear to me that the peripheral countries cannot stay within the EMU unless the core members commit to significant fiscal transfers. If these fiscal transfers are combined with meaningful reform (along the lines of having Germans collect taxes in Greece), the Eurozone will come out of this stronger than ever. Otherwise, it's all over.