Waiting for details on the trillion-dollar rescue
It’s not all that easy to tell, but it looks very much as though most of today’s market rally is a function of the ECB deciding that it can start buying bonds in the secondary market after all. The trillion-dollar announcement from the EU looks big and grand, but ultimately is so vague that few market participants would place much stock in it.
If you have 16 central banks all announcing that they will buy both government and private debt, that’s going to provide a one-day boost to markets, which are going to price in all that future demand. But if all that yesterday’s announcements achieved was a one-day rise in stocks and bonds, that counts as failure. What’s important is that markets are so impressed by the trillion-dollar fund side of things that they don’t even bother selling the debt of countries like Spain and Portugal, since they know that a solid safety net exists.
That’s not going to happen. Just like Hank Paulson’s TARP bazooka had to be pulled out and used, the markets are going to push the Eurozone periphery to a point at which the new bailout mechanism needs to be activated. And right now, nobody knows how or whether that mechanism is going to work. Does it need to be ratified by every individual country which is providing a guarantee? How cheaply will the SPV be able to borrow? Will it just borrow at floating rates overnight while lending at three-year terms, thereby essentially becoming a bank? How much faith will the markets place in the fragmented set of guarantees which is meant to reassure lenders to the SPV that they will be paid back in full? If one country fails to make its pro-rated payment, what happens then? Does the SPV have seniority over private-sector bondholders and even bilateral lenders in the way that the IMF does? Can any of this work in the absence of a formal international treaty setting it up? There are simply too many questions and too many uncertainties for anybody to be reassured at this point that the eurozone’s fiscal problems have found even an intermediate-term solution.
Well done to the ECB, then, for saving the day — at the cost of its own independence. Let’s hope that it saves at least the rest of the year as well. Otherwise the cost was surely too much of a price to pay.