The ECB has adamantly refused to take the single, simple step that would solve the crisis overnight: printing cash and buying sovereign debt. Last week Mario Draghi, whilst once again refusing to contemplate such steps on principle, rather cagily announced that eurozone banks could borrow effectively unlimited amounts at cheap, below market rates.
While on the surface in the tradition of his austere, ideological and rather mistaken German predecessor, this could in fact be a sly move from the recently installed Italian: for eurozone banks could use the cheap cash to buy their own nation’s debt at their own government’s auctions.
The next six months will certainly have their share of thrills. From February to April, Italy needs to borrow 150 billion euros alone, whilst over the course of next year the Zone’s total funding is 800 billion. It’s worth taking a look at the existing firepower from the ‘timid’ steps taken so far (these came from TMM who offer more detail and better writing):
1. The EFSF has 250 billion euros at its fingertips. If it can find a lender (not Chinese, perhaps ECB?) this could potentially be leveraged to 750 billion.
2. The ECB is purchasing 5 billion euros of sovereign debt a week, which comes to around 250 billion a year.
3. European Stability Mechanism has capacity of around 500 billion, from July 2012.
4. IMF has 300 billion – the recent summit offered lending of 200 more.
Obviously using the IMF is far from ideal: under default the fund gets paid first, making remaining debt worth less and less, causing a feedback loop where IMF assistance actually worsens yields, making debt levels more unsustainable, locking countries further out of markets and so on but all that aside, using the existing arsenal we are finally getting to the point where 2012’s funding looks manageable, especially with a little arm-twisting of real money pension funds, insurance companies and the like who have to turn up and buy at auctions anyway.
Now add in the fact Mario Draghi will allow the banks to buy sovereign debt at yielding 6-7% and park it at the ECB with only a mild yield haircut, and all of a sudden things are a whole lot less scary.
Across the globe a eurozone blowup is held up as the major risk to global growth, leading companies and investment managers to hold extremely high levels of cash. If the feared blow-up doesn’t actually occur, that cash can’t stay on the sidelines forever. Buy the fucking dip.