Over the past 30 months of the Eurozone debt contagion there have been several Hail Mary plays thrown at the markets, but none of them had a long-term sustainable impact as they were all doomed to fail. Politicians and law makers have never addressed the core of the problems and continue to ignore what caused the debt contagion.
The newest hype is an unlimited bond buying bonanza by the ECB. Traders drooled over the idea that the ECB may intoxicate its balance sheet with junk bonds from Eurozone members under water. The focus will of course lie in Greek, Portuguese, Spanish and Italian bonds. The hope is to drive down yields and keep them there which would ease financing issues for those countries. The ECB would buy bonds nobody wants and hope that they will get repaid one day somehow.
Traders eagerly await the policy decision by the ECB in September where such a plan, which faces heavy opposition from Germany, may be announced. The ECB has denied a limitless agenda and German magazine Der Spiegel reported earlier this week that the ECB plans a limit for bond yield spreads in Italy and Spain. The report ignited a rally in global markets as well as the Euro which were later reversed as an ECB official called the report misleading.
The ECB, which learned how politicians abuse their lender-of-last-resort super bazooka with its Italian adventure, claimed that any bond buying frenzy would only complement strict budget cuts and as addition to European bailout funds. The European Stability Mechanism is expected to be operational after September 12th and traders await the September 6th decision by the ECB. Germany, the biggest contributor to everything Euro related, opposes a limitless bond buying brain fart Draghi came up with.
A better solution would be a Eurozone Banking Union which would allow the ECB to manage all banks in the Eurozone and step in if necessary. There is also a long-term refinancing option for banks and governments option which would be the second choice. The worst idea is the intoxication of the ECB balance sheet which is the new hype among dumb money investors and traders. As soon as they actually go through with the bond purchases they will allow the situation to spiral out of control in the long-term and miss yet another chance to address the core issues of the debt contagion.
The hope is that the ECB would allow troubled members to refinance themselves with massive bailouts which will lead to economic growth in the future. A healthy economy is not build on hope. The Troika, which is comprised of the ECB, IMF and European Commission, already struggle with Greece whose Prime Minister Samaras will ask for an additional two year extension to his countries bailout terms. Greece is a prime example of why bailouts will not work. Spain is months if not weeks away from asking for a full bailout which would send the Troika all over Madrid. Italy is also on standby for a bailout.
The core issues with the Eurozone are structural and need to be resolved in order to put the debt contagion in the rearview mirror, enter a five year recession and emerge as a powerful economy. It would allow the world’s largest economy to once again be an engine for growth. The debt contagion is a once in a lifetime chance to throw out the old dysfunctional structure and replace it with a working long-term solution.