Nearly €70 billion of coupon and principal payments on Italian bonds are due in September 2011. I doubt that there is enough market appetite to meet this substantial supply at reasonable rates without the intervention of the ECB.
The Italian government doesn’t have the strength to craft a credible austerity cum structural reform package in the next few days (after not delivering it for 20 years). Confronted with market panic, the ECB will buy nevertheless.
First came excessive debt in the private sector. Then governments took over the private sector debt. Being the alternative so painful (disorderly default, banking system collapse, …), it is now the turn of the last balance sheet left (central banks).
Martin Wolf has another scary op-ed on the Eurozone crisis. He brings up a component of the economic imbalances within the Eurozone that so far has been out of the spotlight: borrowing within the European Central Bank System of PIGS national central banks from German and Dutch national central banks, to the tune of €300 billion.
I recently heard Nouriel Roubini in Milan saying that what needs to be done about the euro debt crisis is clear and the main risk he sees is “policy risk”; I am not so sure anymore that the plan to orderly get out of this mess is so clear and the only risk is an execution risk by our politicians. Below is how Martin Wolf closes his piece:
The eurozone confronts a choice between two intolerable options: either default and partial dissolution or open-ended official support. The existence of this choice proves that an enduring union will at the very least need deeper financial integration and greater fiscal support than was originally envisaged. How will the politics of these choices now play out? I truly have no idea. I wonder whether anybody does.
Euroland politicians think they can (1) fight markets, (2) inflict infinite pain on voters in democratic countries, and (3) whip the profligate into line. They can do none of these.
What we are currently experiencing is a crisis of public finances in advanced economies. It started with Greece, and the euro, because of the specific institutional framework which prevents Greece and the other euro area countries from using the inflation tax to overcome their budgetary problems. This will force euro area countries to address their fiscal positions earlier. It’s not easy. But it will be done, because it can be done and it has to be done in any case. And, last but not least, because there are no alternatives.
