Is Coordinated Central Bank Intervention in the Eurozone A Good Sign?


The Eurozone crisis has been going on for quite a while now, and the key issue that keeps coming up is how countries will pay for their debts. (1)(2)(3) This is not the beginning of the crisis, and it is likely not the end of it either. The financing of the debt of the respective countries like Greece and Italy triggers these crises, and the printing of money or the promising to do so from central banks temporarily delays the crises. When the cost of this financing reaches 7%, represented by the 10 year benchmark bond yield, bailout loans are requested. This number was cited when Greek bonds yielded higher than 7%, and then when Italy’s yield reached 7%. This also happened with Portugal and Ireland. (4)(5)(6)(7) The fact that the backstop for the financing of the debt is coming from 6 central banks, including countries that are not in the Eurozone is a red flag in that if Europe could solve the issue by itself, wouldn’t it? Up until now, bailout loans were performed by ECB or IMF intervention or both. (8)(9)(10) Is the Eurozone crisis close to being resolved? There is another 1 Trillion dollars worth of debt coming due for refinancing throughout the Eurozone in 2012 for several countries, in various stages. There is also 900 Billion worth of financing from banks which will compete for this financing. (11) Each time a portion of the refinancing comes due, a crisis could be triggered if nobody buys the bonds, or wants a high yield to own them. Some of this money is rolling over of existing debt, but it doesn’t matter. If a lender sees their debt mature, and the risk has gone up since the last time they purchased the debt, they will likely want more yield than the last time, or will not buy the debt at all. Both of these scenarios point to less demand for the debt, higher yields, and larger crises. The backstopping banks like the IMF, ECB or the other central banks involved will then have to provide more liquidity / print more money / issue more debt to contain the situation. More austerity measures may come up to pay for this, and the intensity may increase. This scenario appears to be in a spiral, and markets may continue getting more volatile in the coming year.

1)                  http://www.babypips.com/blogs/piponomics/euro-zone-bailouts-the-three-little-piigs.html

2)                  http://www.reuters.com/article/2009/12/17/europe-fringe-idUSLDE5BG1EF20091217

3)                  http://in.reuters.com/article/2011/04/07/idINIndia-56176920110407

4)                  http://www.bloomberg.com/news/2011-11-09/european-stocks-rise-as-italy-s-berlusconi-offers-to-resign-metro-climbs.html

5)                  http://www.marquetteassociates.com/Research/ChartoftheWeek/ThisWeeksChart/tabid/121/ArticleID/36/10-Year-Government-Bond-Yields-in-PIIGS.aspx

6)                  http://www.econmatters.com/2011/12/charting-euro-zone-crisis.html

7)                  http://www.guardian.co.uk/business/blog/2011/nov/15/eurozone-crisis-gdp-germany-france-italy

8)                  http://www.theglobeandmail.com/report-on-business/international-news/central-banks-turn-on-the-taps/article2254698/

9)                  http://www.bloomberg.com/news/2011-12-01/dollar-proves-best-bet-as-investors-reject-stocks-for-safety-of-treasuries.html

10)              http://www.breakingnews.ie/ireland/ececbimf-review-mission-approves-ireland-bailout-funding-505486.html\

11)              http://www.bloomberg.com/news/2011-12-02/banks-vie-with-nations-to-sate-2t-need.html

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About joetheinvestor
Joe Barbieri has Bachelors degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 12 years, covering positions from Retail Customer Service and Fund Accounting, through to Investment Research on the Institutional side. He has worked in 5 companies, spanning banks, a mutual fund, a Consulting Firm and a Large Canadian Pension Plan. He currently has a Chartered Financial Analyst designation (CFA) from the CFA Institute. He has recently published articles in Pension and Benefits Monitor Magazine as well as the Internet.

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