Martinghoul, w/ the latest news that ECB is buying Italian and Spanish bond, and I notice the 5 yr. Italian CDS and Spanish CDS has dropped drastically, do you now believe the crisis in Italy or Spain is over?
2011/08/09 Greece:1700,Ireland:750,Portugal:850,Spain:350,Ita ly:340,Belgum:240 France:?,NL:71,Germany:78,Sweden:53,UK:78,US:78,Ru ssia:182, Argentina:770,Brazil:160,Japan:92,Hungary:415,Aust ria:107, Venezuela:1140,Bulgaria:275,China:102,Turkey:180,U S-bank:190, Ukraine:540 DOW:1056,Nikkei:8700,oil:78.6,gold:1760,30yBond:13 5.5,10yBond:128.6, Euro:142.3,Yen:129.6
The Italian's 5 yr. CDS dropped 12.169% THe Spain's 5 yr. CDS dropped 13.01% Since you said it's not over, can you elaborate, why won't the ECB continue effort to buy up the Italian's and Spanish bond fixes the CDS problem? As you may remember, this whole thing started when 2 of the Italian bank were in trouble, as if some1 is doing a run on those 2 banks, so by bring down the CDS, doesn't the ECB contains the problem? what else could go wrong?
What about the idea that if they actually do increase the EFSF to cover Italy and Spain, suddenly Germany is looking at backstopping 130% or so of their GDP? I don't think Germany is going to sign up for that. Additionally, a strong EFSF still doesn't solve the structural issues that got these countries here in the first place. Even with austerity, assuming they pass it and actually implement it as described (a ginormous IF) then growth vaporizes (what little growth there is).
Firstly, we know that the ECB bond purchases (the SMP programme) aren't the silver bullet, as evidenced by what happened with Greece/Portugal/Ireland. Sure, you could argue that Italy and Spain are different, but that argument only goes so far. Ultimately, as I have mentioned earlier, it's all about a systemic solution that's large enough, whether it's the ECB or the EFSF (and there's all sorts of difficulties that the ECB will have if it tries to expand its balance sheet by the neceessary $1trn). The problem, however, is that there have been a lot of prominent Germans (and the Slovaks, for that matter) who have come out vociferously against the EFSF and the ECB both. This tells me that if the ECB/EFSF gets too big and goes too far, there will be a political crisis in Germany (and riots). So there's a very very fine line that the Eurocrats need to walk and I, for one, can easily imagine them wobbling.
Well, let's assume for the moment (optimistically) that the structural reforms do take place in these countries. Obviously, EFSF is a support mechanism that ensures fiscal transfers in place, as parts of Europe go through the various adjustments. So, in theory, if everyone commits to the EMU long-term, it has a chance. Problem is that the Germans are now saying that this isn't what they signed up for in the first place, when they adopted the Euro.
So you're saying that the following things have to happen: 1. Structural reforms in these countries occur. 2. Fiscal Union is created (because let's face it, without a fiscal union, this is all an exercise in futility in the long run). 3. Germany has to sign up to take on all the debt. And people think this will occur?
Well, that's exactly my point... Lots and lots of things have to go right for all these things to happen, hence me being such a skeptic. Of course, there's another possibility, which is that the world growth takes off, which means that everything is just a lot easier. Obviously, the mkt hasn't exactly been too excited with that idea recently.
I just don't see how world growth takes off with long overdue austerity being forced in so many places. The bursting of the global debt bubble that has been blowing for so long isn't a process that works itself out in a matter of one or two years.