Technocrats can’t cure the contagion

November 15, 2011

James Saft is a Reuters columnist. The opinions expressed are his own.

Now it is Spain.

The message from markets is not so much that Italy is too big to fail but that Greece will fail and in doing so ensnare others.

The prospect of two new avowedly technocratic governments and fresh pledges and plans for austerity proved not enough to stem contagion in the euro zone, as the financing drought spread beyond Greece and Italy to Spain. Spanish 10-year bond yields climbed above 6 percent for the first time since early August when the European Central Bank waded into bond markets in Spain’s support.

Perhaps that is because the contagion isn’t coming from Athens or Rome but from governments in Berlin, Paris and the ECB in Frankfurt, all of which seem unwilling to take the needed steps to save the euro.

The era of good feeling following Silvio Berlusconi’s resignation and the appointment of former European Commissioner Mario Monti as premier-designate was, well, short. While Italian bond yields are well below the mid-7-percent levels of last week, they rose again on Monday to 6.67 percent and Italy was forced to pay a euro-era record to sell five-year bonds.

It didn’t stop there, with the costs to insure French and Belgian bonds against default also rising to a euro-era high.

With the ECB still acting as if it would fight the last war to the death while remaining strangely aloof to the burning building around it, the sell-off was little wonder.

“You won’t solve the crisis by reducing incentives for the Italian government to act,” ECB governing council member Jens Weidmann told the Financial Times. He also, in a separate speech, called for an end to international pressure on the ECB to act because it could undermine the central bank’s credibility.

While Weidmann, who also heads the German Bundesbank, is from the hard core of ECB bankers who oppose intervention, his comments underline the perhaps impossible position the euro zone finds itself in.

Without wholesale intervention, in the form of massive purchases of government bonds with freshly printed cash from Italy and whichever other state finds itself hard up, the euro project looks very vulnerable to toppling over.

The logic of contagion, this time directed at Spain, is pretty simple. If the ECB won’t act, no force exists to serve as a firebreak, without which financial markets will simply press on, assuming that either a failure or a bail-out with haircuts of one will spread to others.

The risible bending over backward to make Greece appear not to default under the most recent deal is an example, and actually serves to make Weidmann’s point as well.

The moral hazard of an ECB printing German money and giving it to Italy and its creditors, for example, will inevitably bring with it maneuvering by Spain, Ireland and perhaps eventually France for similar terms.


German Chancellor Angela Merkel and French President Nicolas Sarkozy first broached the subject of euro exit last month when they labeled a bailout referendum proposed by then Greek Prime Minister Papandreou as a vote on euro membership. That had the intended effect of forcing him into a U-turn before he stepped down, but did let the genie out of the bottle for the rest of the euro zone.

A vote by Merkel’s Christian Democratic Union to allow euro members to leave the euro doesn’t help either. Nor does an unsourced story in Germany’s Der Spiegel contending that German scenario planning envisions a stronger euro area after a Greek exit from the project.

Like it or not, market prices are indicating that an exit by Greece is becoming more likely, and that in itself makes other exits or a wholesale reorganization more likely. This brings us back to the lack of a true central bank in Europe, one that can serve as a lender of last resort for sovereigns. Without that, or a naked policy of huge fiscal transfers from Germany to the south and its creditors, there is little to stop a huge run on sovereign credit, and on the banks that are exposed to sovereign credit.

Those banks are very likely exacerbating things by lightening up their own sovereign exposure, trying to front run what is going to be an absurdly difficult task of raising capital ahead of the supposed mid-2012 targets outlined in the rescue plan.

If there is a benign interpretation of all of this, it is that the ECB, Germany and to an extent France are bargaining hard to extract maximum concessions from southern Europe before they at last backpedal and orchestrate the big money-printing exercise.

Let’s hope that when they reach for that bazooka they find it is still there.

At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

The use of the word ‘technocrat’ is an inappropriate attempt to imply affinity with science and technology. This is unfortunate as ‘technologists and scientists’ are totally excluded from the proceedings and discourse, even though we now live in a technology-driven world.

Posted by mattathil | Report as abusive

An underwelmingly repetitious opinion. Quantitative Easing is raging in the Fed and England, with dire consequences for the retirement savings of the middle class. No wonder England is so desperate for the ECB to press a button and produce digital money from nowhere. It is your biggest market and decreased consumption in the EU will exacerbate the recession in your country.

No amount of catcalls, jeering and histrionic counting down the day(s) of doom will change the inexorable grind of fiscal fitness in the Eurozone. You need to spend more time opining on your own QE consequences, given the probability that England´s recession and faltering balance of payments will not be rescued by growth in the Eurozone market. So what’s your plan, or do you even have one?

Posted by scythe | Report as abusive

To be fair, “scythe”, whoever you are, James is continuing his practice of looking further ahead than other columnists. He is the first I’ve seen to actually credit the notion that a rational fear of moral hazard might be what is preventing Germany from acting, rather than an irrational fear of history.

Posted by Ian_Kemmish | Report as abusive

Germany should leave the Euro ! Or if they don’t want to accept that the money they lent various countries , to buy German goods , in the first place won’t be coming back .
Either p**s or get off the pot I think is the phrase
Yes the technical solution , i.e.let the ECB live up to it’s name and act as such either by printing money or by guarantees is valid for a few more days but realistically not much longer before the damage is irreparable . James and others are telling it as it is and the majority including Ms Merkel seem to have their hands over their ears and are shouting not listening !

Posted by battersea2 | Report as abusive

@ Ian_Kemmish The point of argument is quantitative easing, an argument repeated ad nauseum by the non-euro member. And for whose purpose? The tedium of browsing this level of propaganda – it is not news – is beginning to wear thin. Unless broken record is a new form of journalism.

Perhaps James could remain on point and discuss the ramifications for England´s economy if the Eurozone ultimately resists implementing quantitative easing.

Irrespective of the solutions the eurozone and ECB offered, they were never to the liking of the market’s journalists. Consistently the option of quantitative easing has been ruled out, but this appears to be the only journalist thread running in the non-euro UK and US camp. Decidedly anti-German divide and rule to boot.

So when you receive a comment from the back saying “Give it up James”, that is an invitation to try the other side of the page for a change. Even if it is the antithesis of his predilection.
The reader is not just a pair of reluctant ears.

Posted by scythe | Report as abusive

I applaud the germans for sticking to their guns on fiscal responsibility. This is democracy in action, each party has something different and unique to gain or lose in “their solution”. In the end the ECB will print money after the germans get some fiscal sovereignty over other countries in the euro. Thats how creditors are. Even if germany left the euro, they’d still have to print money like switzerland, to keep their new mark low enough relative to the euro as a lot of their credit and customers are in euros. In a fractional banking system only 10% of your money is available, the central bank has already committed to print the other 90% under the guise of “liquidity”. We have a bank run going on in europe, so liquidity will have to happen. I wish we had some of the european democracy and discussion here, but instead we have 12 guys behind closed doors ignoring the biggest issues, as if the voters aren’t paying attention

Posted by simpletruths | Report as abusive

Europe is better off without a centralized single State, with a centralized single military and a centralized single Ruler or Dictator. And make no mistake, centralization is the enemy of freedom, the inevitable enemy of liberty and dignity for the mass of humanity. A centralized, strong State is the source of wars of aggression. Look at the USA and what it has become.

A free Europe is better than a Europe in chains again.

Posted by txgadfly | Report as abusive

The markets are telling the world that inflation and rates are heading towards the 7% mark.

That is actually a healthy yield for fixed income instruments (bonds) and to stimulate at least a “perception” growth out of asset deflation.

Is there any other way out?

Posted by robb1 | Report as abusive

OK, James Saft, you cranky ole pessimist. It’s time to earn your salary and tell us something we don’t know.
Tell us something useful, such as where is a good place to make some decent profits given the current environment?
Cmon, hang it out there. Be brave and put an opinion on the table for once.
And don’t tell us to short the euro. We’re already doing that. What else?
Your friend from Alaska!
Not Sarah Palin’s neighbor but I can see Russia from my porch too!

Posted by SeaStar1 | Report as abusive

An alternative view of the technocrats. Informative while remaining critical. cle/1177241-our-friends-goldman-sachs

(quote) “Mario Monti, Lucas Papademos and Mario Draghi have something in common: they have all worked for the American investment bank (Goldman Sachs). This is not a coincidence, but evidence of a strategy to exert influence that has perhaps already reached its limits.”

Add to that network Otmar Issing (Germany) and Peter Sutherland (Ireland)

Posted by scythe | Report as abusive

There appears to be an opinion that if only the ECB would act as a lender of last resort then all will be well. I would like to know exactly how that is going to work without there being a transfer of wealth from north to south Euro zone, paid for by the German tax payer. An ECB guarantee isn’t going to turn the Greek or Italian economies into the Germans model overnight, if ever. All of the fundamental problems causing the countries to be under bond pressure will still exist and the incentive to fix them will reduce as ‘the Germans will pay’. I’m not German, but if I were I would resist this scenario with as much force as I could muster. The ECB buying up bonds would cause huge resentment and conflict. Weidmann is absolutely correct – it is up to the individual countries concerned to get their house in order. This may not be possible for Greece and it should leave the Euro but Italy most certainly could restore confidence if it really tried.

Posted by pavlaki | Report as abusive

I hope that we can agree that the Euro problem is more political than a clash of economic theories. Having seen the unsightly spectacle of Greek politicians squabbling like a bunch of autistic children (before being sent away) while their house is on fire, having seen Berlusconi-the-buffoon sit back, looking at underage girls while Italy disappears under the waves, and Italian politicians acting as if nothing is the matter, having seen this and more, one wonders how to have a single currency with this kind of nations. In both countries, old guard politicians are already clamoring to get the reins back, so you already can see failure or disaster coming. Democracy is wonderful, but it doesn´t work the same way everywhere. Just try ´increasing integration´ under these circumstances.

Posted by Beethoven | Report as abusive