How Germany Just Undercut the Euro

A German court may have just weakened European Central Bank President Mario Draghi’s most potent weapon in the battle to save the euro.

Back in July 2012, Draghi calmed panicked markets with a pledge to do “whatever it takes” to defend the euro and with a program, known as outright monetary transactions, to stabilize interest rates throughout the euro area by buying the bonds of financially distressed governments. The move was a game changer, shifting the crisis in Europe from acute to chronic. European markets have been relatively calm ever since. 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

Did the ECB Just Warn Italian Voters Against Berlusconi?

The European Central Bank this week, for the first time, published details of its former bond-buying initiative, known as the Securities Markets Program. The timing of the release, on the eve of Italy’s Feb. 24-25 elections, is as interesting as the data.  Read more of this post

Ireland Should Drop Model-Student Act and Get Help

Talk to practically any investors in London and they will tell you Ireland is a shining example of a successful euro-area bailout program, a narrative that the country’s international creditors eagerly endorse.

So it might have come as a surprise when Finance Minister Michael Noonan said at a meeting with his euro-area counterparts this week that the Irish — and Portuguese — may get an extension on the maturities of some of their bailout loans.

This would help to reduce Ireland’s debt burden, of course. But why is it necessary if Ireland’s bailout has been such a success? The answer is simple: Ireland’s debt is not yet on a sustainable path, and the country needs more help to return to one if it’s to become the success story that many say it already is. Read more of this post

All is calm in the EZ…or is it?

All is relatively quiet in the eurozone these days – or at least that is what you might think, speaking to portfolio managers over the past few months. German chancellor Angela Merkel has visited Greece, Ireland has re-entered the bond markets and the ECB’s balance sheet is in play for Spain and Italy, so what is there to worry about?

Plenty. While the most disastrous possible risk – a complete, disorderly disintegration of the eurozone – has been greatly reduced by the ECB’s new bond-buying programme, Outright Monetary Transactions (OMT), the worst of the eurozone crisis is by no means behind us. Read more of this post

What might debunk OMT euphoria?

Last week rumors emerged that eurozone (EZ) policymakers were considering using the ESM to provide a first loss guarantee on Spanish government debt.  This news was leaked the same day that Mario Draghi reiterated at the ECB governing council meeting that the ECB would activate its shiny new Outright Monetary Transactions (OMT) program only once a country has submitted to EFSF/ESM conditionality. What struck me as puzzling was that EU policymakers seem to be trying to come up with plans to bolster the so-called firewall of official support they have built just as they are also insisting the firewall will be sufficient. While this certainly does not inspire confidence, are policymakers wise to be making contingency plans in case the OMT is insufficient? I think the OMT will absolutely help to buy some time for Spain (indeed it already has), but there are a lot of reasons to worry OMT euphoria will wear off and investors will shun Spanish and Italian debt once again. The following are a few potential triggers for investors to lose faith in policymakers’ abilities to stop the crisis before it completely engulfs Spain and Italy. Read more of this post

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