Germany and other AAA rated eurozone members could have bailed out Greece for as little as €200bn if they had acted quicker and ignored "moral hazard" principles, says Francis Scotland, director Global Macro Research at Brandywine, a subsidiary of Legg Mason.
In our view, the ECB’s actions in late 2011 are a game changer and an overdue necessary development to end the crisis. Lower Italian and Spanish bond yields are a necessary condition to breaking the downward spiral between fiscal austerity and weaker growth. The obvious solution is for commercial banks to buy their national debt with the proceeds from their ECB loans. Lower yields on the debt help stabilize the debt arithmetic and remove the drag of high borrowing costs on the economy while at the same time boosting bank capital and reducing the need for asset sales.
This is monetization European style: otherwise bankrupt commercial banks and bankrupt governments are rescuing each other with money created by the central bank. Risks of inflation or moral hazard pale in comparison to what could happen if the central bank does not act in this manner. Long bond yields have not fallen much in Italy and Spain at the time of writing. Banks have used their first allotment of the ECB’s Long Term Refinancing Operation to rebuild liquidity. But spreads on peripheral countries’ short-term interest rates have narrowed significantly relative to German interest rates and it remains to be seen how events play out later this year.
More stimulus and non-market intervention in Europe should be expected this year if trends in other countries are any example. The British continue to employ quantitative easing. The U.S. Federal Reserve has mapped out low interest rate expectations to the end of 2014. More stimulus should be expected from the ECB along with efforts to draw out Europe’s adjustment phase to higher capital ratios.
Suspension of mark-to-market accounting was a major support for the U.S. banks rebuilding profitability in 2009. It would be no surprise to see delays or modifications in the implementation of Basel III in order to buy time.