Bulgarian Election Shows Need to Clean House

It looks as though the center-right Citizens for European Development party won Bulgaria’s early elections, the same party that triggered the vote by resigning from government amid protests in February. So has anything changed?

The short answer is yes. The elections show that Bulgarians have lost all faith in a corrupt elite, and the next government — whatever shape it takes — is likely to be weak and unstable. Read more of this post

Slovenia Bailout Would Be Spanish-Cypriot Mongrel

The ink on the provisional bailout agreement for Cyprus was hardly dry last month before bond markets shifted their attention to Slovenia, another small euro- area country with a banking problem. The Slovenian government’s borrowing costs subsequently shot up.

The fear that Slovenia might be the next Cyprus, with international creditors again forcing losses onto bank bondholders and uninsured depositors, is only partly justified. Slovenia isn’t Cyprus, and its rescue program, when it comes, will probably look like a hybrid between the Spanish-style bailout and the Cyprus-style bail-in. Read more of this post

Cyprus Shows Trust in ECB is Misplaced

Ever since European Central Bank President Mario Draghi said last July that the bank will do whatever it takes to preserve the euro, complacency has pervaded Europe’s single-currency area. Markets have weathered potential crises in Italy and Spain with surprising calm, secure in the knowledge that the ECB will save the day if needed.

This was always a false assumption, as events in Cyprus have made clear. There are significant limitations to the support the ECB is willing or able to offer, even to such a tiny island economy whose needs are easily affordable. Read more of this post

Euro Area Ruins its Progress with Cyprus Deal

There’s nothing like having part of your savings account confiscated overnight to make you feel that your money isn’t safe.

That’s what depositors in Cypriot banks awoke to on March 16, when they found their accounts frozen for at least five days to avoid panicked withdrawals. Read more of this post

To Get a Bailout, Cyprus Needs to Launder Its Reputation

For months now, the euro area and other international creditors have been debating whether to bail out tiny Cyprus, which accounts for just 0.2 percent of the currency zone’s economy. Why the holdup?

International creditors have said the stumbling block is that they are looking for a way to bail out the country without putting it on an unsustainable debt path. The real problem, though, is German elections in September: Many Germans believe Cyprus is one big money laundromat for Russian crooks, and proposing to bail them out is not a vote winner. Read more of this post

Big Bazooka II–Updated!

The crisis has spread to the core. Not only have Italian and Spanish bond yields shot up to unsustainable levels, but Belgian, Austrian and French spreads over the comparable German bunds have risen sharply in recent days as well. If the EU, the ECB and the IMF do nothing and allow the markets to continue to drive this crisis, then the eurozone is likely to unravel in the next few months. Given that it is unlikely the ECB will step in as a lender of last resort (LOLR), the next best option for keeping the eurozone intact is to cobble together enough real, hard cash to create a Big Bazooka II. Read more of this post

Italy: Past the Point of No Return

Yesterday Italy’s ten-year government bond yields soared well above 7%, the level beyond which Greece, Ireland and Portugal were all pushed into EU/IMF bailout programmes. Having been frozen out of the markets, Italy now faces a buyer’s strike. Its only possible options going forward are a bailout or a bail-in. Because Italy is too big to bail out, a debt restructuring seems inevitable. Read more of this post

ECB bond purchases won’t really help

I have discovered a new leading indicator for when the eurozone is going to go into full meltdown mode: my holidays. The good news is I’ve just returned from a holiday that spanned the second half of last week. The bad news is I’m only back for a few hours before flying off again for a whole week. This does not bode well for the euro crisis, but neither does any recent policy making at the EU level. This includes the ECB’s announcement on Sunday that it will intervene actively in the markets through its Securities Markets Programme (SMP), indicating it will purchase significant amounts of Italian and Spanish government debt. This move alone is very unlikely to offer lasting reprieve in the euro crisis.

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September will be a perfect storm in the euro crisis

The August holidays are about to set in. Given the consistent pressure placed on Italian and Spanish debt over the past few days pushing yields to record highs, we may skip the annual August lull in Europe this year. But even if we don’t and news on the euro crisis grows quieter this month, September promises to be a perfect storm in the euro crisis for a number of reasons.

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4 reasons the recent EU summit agreement will fail

I was planted firmly on a beach chair on holiday during the EU summit on July 21st and was worried I might be missing a piece of European history-in-the-making. As it turns out, I didn’t miss much at all. Upon my return a few days later, analysts were just as confused about the outcome of the EU summit as they had been immediately following its conclusion. Digging into the details of what was agreed at the EU summit, there are four main problems that will preclude the agreement from drawing a line under this crisis.

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