How the “Euro penalty” is damaging the EMU?


Urbanomics

via How the "Euro penalty" is damaging the EMU?.

The fundamental issue is that all the major economies are backed by their respective central banks which have unlimited cheque writing powers (atleast technically) and are virtual lenders and insurers of last resort. Markets have realized that with the ECB statutorily barred from lending directly to governments, the Eurozone members face no such backstop facility. If Spain or any other country faces a run on their banks, they cannot count on the ECB to step in with emergency cash assistance. Nor can the countries themselves print Euros. Eurozone members, therefore, face a Euro penalty which reflects in their sovereign debt premiums.

In fact, the importance of this is underlined by the manner in which the last round of such panic was redressed with the second round of Long Term Refinancing Operation (LTRO) loans in March. These unlimited three-year loans by the ECB at low interest rates were quickly lapped up by the Eurozone banks and then used to buy sovereign bonds, which in turn experienced a sudden fall in yields. However, once its effects tapered off, market confidence has dipped and yields have been soaring

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s